Analyzing Financial Statements: Ratios and Recommendations

This case study delves into the core concepts of financial management and its crucial role in organizational success. It emphasizes the importance of financial planning, resource allocation, and effective decision-making. The study examines the application of financial ratios to evaluate a company's performance, focusing on profitability, liquidity, and efficiency ratios. Through a detailed analysis of these ratios, the case study identifies key areas for improvement in the financial performance of the business, offering specific recommendations to enhance profitability, manage liquidity effectively, and optimize resource utilization. The analysis includes calculations and interpretations of gross profit ratio, net profit ratio, current ratio, and acid-test ratio, providing a comprehensive understanding of the company's financial health and potential strategies for future growth and stability.

Financial Statements

Contents
INTRODUCTION...........................................................................................................................2
SECTION 1......................................................................................................................................2
Explain Financial management and concept of financial management.................................2
SECTION 2......................................................................................................................................3
Elaborate financial statement and uses of financial ratios......................................................3
SECTION 3......................................................................................................................................5
()1) Business Review Template..............................................................................................5
Fill the income Statement.......................................................................................................5
Complete the balance sheet in excel.......................................................................................6
Analysis of the profitability, liquidity and efficient ratios.....................................................7
SECTION 4....................................................................................................................................10
Analyse and give recommendation for the improvement of financial performance............10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
APPENDIX....................................................................................................................................13
1

INTRODUCTION
This case study mainly talks about the concept of financial management and the importance
of financial management in the organization for achieving the goals very effectively and
efficiently. Basically it helps the organization to make financial plan, allocation and utilisation of
funds and assist to make financial decision and it only happen when the firm plan its activity
properly, organize the structure of plan, hiring more candidate if required to perform the task and
then direct and control the employees to manage the activity into the firm with full efficiency. In
this case study it should also discuss about the use of ratios which show the performance of an
enterprise, then find the profitability, liquidity and efficiency ratios of the company to know the
actual position and then suggest some area of improvement in the financial performance of the
business (Aflatoni, 2019.).
SECTION 1
Explain Financial management and concept of financial management.
This is one of the most important part of every business because the activity of every
organization depends upon the financial management of the company without the proper strategy
no company can achieve the goals of the organization. On the other hand, it’s also necessary for
every organization to direct its finance effectively and efficiently. Now, let's talk about the main
concept of financial management. It is the area of activity in which company is answerable for
prevailing and utilization of funds very effectively and its needed for efficient performance or it
can also say that the financial management involves planning the activity, organizing the
structure, directing and controlling the employees of the organization for the financial task of the
business like; acquisition and proper utilisation of funds of a firm (Biplob and Abdullah, 2019).
Importance of financial management
 It assists the firm to make financial plan: In this step financial planning is very helpful to
achieve the objectives of the firm but it can only possible when company prepare a
proper strategy to achieve the targets of the organization and work according to the plan
and follow all the steps then in that case company definitely achieve the targets of the
firm because planning already decided in advance what to do, who is to do and how to
do. Its easier to analyse the individual task into the organization.
 It assists the firm in effectively utilising and allocating the procurement of funds
received: In this point if a company don't want to increase their expenditure then they
need to utilize the resources properly and use the funds into the effective work so the
organization achieve its efficiency in work and in less time with minimum efforts. In
financial management with the help of planning it's very easy for the company to the best
use of funds through proper strategy. In this point it also need to understand that while
employees of the organization performing the task then it should be done in proper
manner without wasting the any resource with using proper utilisation of funds.
 It assists the firm to take important financial decisions: In this point financial
management help the organization to take important financial decision related to the
organization with the help of all the functions of management. If company facing any
issue while performing the task, then it helps to analyse the issue and try to fix that
problem into the business before expansion of that particular problem.
 It assists the business to make in a profitable situation: if company perform the activity
with the proper planning and first organize the structure of task and analyse the actual
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manpower required in the organization to perform the task and in last direct and control
the employees of the company and provide them proper feedback of their work and
maintain good relation with them then definitely firm can achieve the targets and earn
more profits.
 Encourage employee to save money for their future financial necessities: This is a very
important point in the context of the employee because it talks about in favour of
employee. Basically it says that employees of the organization should try to save money
for their future financial requirement because future is uncertain and if they retain money
then it will definitely fulfil its requirement in future (Braune, Charosky and Hikkerova,
2019.).
SECTION 2
Elaborate financial statement and uses of financial ratios.
Financial statement indicates the financial position and growth of the company or how much
the company can generate cash. Financial statement keeps a record of day to day activities and it
creates a framework of financial statement. It shows the profitability and ability to stay of a
company. It contains the income statement, statement of cash flows and balance sheet.
Advantages of financial Statement
 It helps to analyse capability of a company to make cash and also help to describe the
sources and utilization of that cash.
 To analyse business strength to pay back their outstanding.
 It helps to describe the company position by calculating ratios.
Types of financial statement
 Income Statement = Income statement is also known as profit and loss statement. It
usually prepares monthly, quarterly or annually and shows earning and expense of a
company. It also shows whether the earnings of the company are positive or negative. It
includes revenue, operating expenses, interest, income tax, wages, etc.
Net Profit = Revenue – Cost of goods Sold
 Balance Sheet = Balance sheet shows the assets and liabilities of company and also
analyse whether the income statement is prepared correctly or not. It shows true and fair
view of financial statement of a company and how the assets are capitalized either debt or
Equity. It also refers to book value or shareholder's equity. Difference between the total
assets and total liabilities is equal to the position of the company in the market.
Equity = Total Assets – Total Liabilities
 Cash Flow Statement = Cash Flow statement shows the cash inflows and cash out flows
during a period. In other words, it describes the activity of cash and describe in the books
of cash flow statement. It prepares form the day when business is start-up and then it
includes all inflows and outflows. It records the activity of cash daily, weekly or monthly.
Use of ratio in financial Statement
Ratio Analysis is used to identify the company financial position, growth, effectiveness and
efficiently utilization of resources and It is also indicating the comparison of financial results that
can be helpful for make effective decision and it is generally calculated quarterly and annually. It
usually identifies how efficiently the company can cover its outstanding debts. It used to identify
the link between two or more factors of financial statement. Following are the importance of
ratio analysis in financial statement (Gathungu and Sabana, 2018).
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 Help to measure productiveness – Ratio is like a tool of management control. They
clearly show big picture of the company financial statement. It works as a key of the
efficiency of the enterprises.
 Decision Making – It helps to indicate the peak level of performance of the company and
efficiently used assets.
 Planning – It helps the management to fulfil the basic activities like planning, utilizing,
control and anticipating. It is done after identifying and examine the previous results,
help to prepare budget to express policies and to prepare plan of action for future.
 Help to improve action strategy – Ratio help to compare two or more firm data. They
help to find which firm is more profitable and successful. It helps to stop the task which
indicates future upcoming risk.
 Easily Understand - It help to easily understandable and play an essential role in
informing the position and progress to the management and partners.
 Help to Measure financial stability – It is useful for management and other concerned
to calculate the firm achievement over a period of time by comparing the present ratio
and previous year. It indicates the firm liquidity position to recover its short term burden
and long term liquidity.
SECTION 3
()1) Business Review Template.
Fill the income Statement.
In Appendix.
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Complete the balance sheet in excel.
Analysis of the profitability, liquidity and efficient ratios
Profitability ratio: In this ratio company analysis the financial performance and take decisions
accordingly. Profitability ratio is also known as accounting ratio it includes:
Gross profit ratio: In this type of ratio company setup the relationship between the gross profit
and the sales of the business, and the company calculate the gross profit ratio with this formula
and the formula is-
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gross profit ratio = (gross profit/net sales) *100
using the figures of the year 2016 calculate the gross profit ratio:
= (81125/189711) *100
=0.428*100
=42.8%
If this ratio the gross profit of 2016 is more than the profit 2015 because in last year company did
not perform well in business activity and in 2016 company give their best to perform activities of
the organisation that's the reason company achieve more gross profit in 2016 in comparison of
2015.
If gross profit is not given in the question, then there is an another formula to calculate
gross profit ratio
Gross profit= Revenue from operations/Net sales – cost of revenue from operation.
Cost of revenue from operation is also known as cost of goods sold, and if the cost of goods sold
is missing in the question then company can find cost of goods sold with this formula:
Cost of goods sold: opening stock + Net Purchases + Direct Expenses – Closing stock.
The goal is to calculate the gross profit ratio is to find the productivity of the company.
▪ Net profit ratio: In this ratio company calculate the relationship between the Net
profit and Net revenue from operations/ Net sales. Here is a formula to calculate
net profit.
Net profit ratio= (Net profit/ Net revenue from operations or Net sales) *100
Using the figures of the year 2016 calculate the Net profit ratio:
= (43057/ 189711) *100
= 0.227*100
= 22.7%
It clearly shown that the overall productivity in 2016 is more than the productivity of 2015. In
the year 2016 company get more net profit then 2015 because company in 2016 more focus on
the overall productivity of the organization and perform its best for achieving the organizational
goals effectively and efficiently.
If net profit is not given, then there is some another formula to find net profit and the
formula is:
Net profit = Net sales – Cost of goods sold – operating expenses – non operating expenses+
non-operating incomes – Tax
The goal is to calculate the net profit to find out the complete productivity of the company.
Liquidity Ratio: This ratio helps to identify the business capacity to pay its short- term debt
commitments. Investors and creditors studied an enterprise and check its liquidity ratio more
than 1.0 and then invest in such companies.
Current ratio: It’s a way to identify the business how nicely company can pay back its
debts again. There is one formula to calculate current ratio:
Current ratio = (Current assets / Current liability)
Using the figures of the year 2016 calculate the current ratio by the given formula:
= (84349 / 37928)
= 2.22:1
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In this ratio it clearly shows the current ratio in comparison with ideal ratio 2:1 is more
because company having high liquidity and able to pay its short- term debts effectively. Current
ratio is also called as working capital ratio it shows how nicely company can fulfil the financial
commitment.
1. Acid-test ratio: In this ratio company identifies the capability to pay off its short- term
liabilities with the assets. This ratio is also called as Quick ratio and there is one formula
to calculate Acid – test ratio:
Acid- test ratio= (Current assets – Stock / Current liabilities).
Using the figures of 2016 calculate the Quick ratio by the given formula:
= (84349 – 28571 / 37928)
= (55778 / 37928)
= 1.47:1
In this ratio it clearly shows that the quick ratio in comparison with ideal ratio is
less because the capability of company to pay off its short term liabilities with the
assets is less effective.
2. Efficiency ratios: This type of ratios determine the efficiency of the company and its
completely depends on the type of business and upcoming decisions of the company.
Inventory turnover ratio= (cost of revenue from operations/ average inventory)
Using the figure of the year 2016 calculate the inventory turnover ratio:
= (108586/ 28571)
= 3.80:1
It clearly shows that the inventory turnover ratio is lies between in 2 and 4 so, in
that case company perform with in full efficiency in the organization and sold out
its stock with full efficiency.
Working capital turnover ratio = Net sales / working capital
Using the figures of the year 2016 calculate the working capital turnover ratio:
= 189711 / 46421
= 4.08:1
It clearly shows that the working capital turnover ratio is more than the 2:1 that means company
is not investing more in assets.
SECTION 4
Analyse and give recommendation for the improvement of financial performance.
The above case study analyses the performance of organization and identify that in some set
of areas company need to improve its financial performance so, that organization can achieve
targets very effectively the factors involves; high expenses, less invest in assets and necessary to
manage good portfolio of the business. If firm having a good portfolio, then number of investors
attract towards their business and invest its money into that organization then the company
having more funds and they think about the business development and growth. Company
necessary to stop more spend on expenses because it can reduce the company revenue and
become a big reason for creating a bad portfolio of the company. In 2016 it clearly stated that the
company spend high on expenses because of this company didn't generate more revenue. It also
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need to more focus on proper utilisation and acquisition of funds with no wastage of resources.
Another area of improvement is investing more on assets because if company investing more in
assets it increases the production of goods in the organization. On the other hand, if company
actually want to invest money in assets then they should Introduce new and innovative
machinery so it can save the time and effort of the employees. In 2016 it clearly shown that the
firm less investing in assets that's why they the efficiency of the company in 2016 was decreases
and can't generate enough profit. If company use new technology and machinery through
investing in more assets, then may be it can earn more profit.
CONCLUSION
As it is concluded from the above report the concept of financial management is to make
strategies the plan and organize the structure to perform the activities and then direct and control
the employees in the firm to perform the financial activities into the company. Basically from the
above case study is clearly showing that the financial management is more important for the
company for performing the various task to achieve the goals and objectives of the business.
Therefore, it also states that the Importance of financial management in every enterprise and how
it assists the corporate to take financial decision in difficult situations. In the organization it's a
duty of finance manager to resolve the problems of employees and provide feedback to them.
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REFERENCES
Books and Journals
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management.
Biplob, H. and Abdullah, M., 2019. The importance of islamic financial literacy for muslims: a
general review. Islam & Civilisational Renewal. 10(1).
Braune, E., Charosky, P. and Hikkerova, L., 2019. Corporate social responsibility, financial
performance and risk in times of economic instability. Journal of Management and
Governance. 23(4). pp.1007-1021.
Gathungu, J.M. and Sabana, B.M., 2018. Entrepreneur financial literacy, financial access,
transaction costs and performance of microenterprises in Nairobi City County in
Kenya. Global Journal of Management and Business Research.
Jennings, J.D., et.al., 2019. Orthopaedic surgery resident financial literacy: an assessment of
knowledge in debt, investment, and retirement savings. The American Surgeon. 85(4).
pp.353-358.
Nadar, D.S. and Wadhwa, B., 2019. Theoretical review of the role of financial ratios. Available
at SSRN 3472673.
Ucar, E., 2019. Creative culture, risk‐taking, and corporate financial decisions. European
Financial Management. 25(3). pp.684-717.
Vovchenko, N.G., et.al., 2019, August. Fuzzy-multiple modification of the spectrum-point
methodology for assessing the financial condition of the company (Based on the Audit-
IT). In International Conference on Theory and Application of Soft Computing,
Computing with Words and Perceptions (pp. 275-283). Springer, Cham.
Wang, G., et.al., 2020. Relationship between internationalization and financial performance:
Evidence from ENR-listed Chinese firms. Journal of Management in
Engineering. 36(2). p.04019044.
Weetman, P., 2018. Financial reporting in Europe: Prospects for research. European
Management Journal. 36(2). pp.153-160.
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APPENDIX
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)(Weetman, 2018.)
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