Applied Business Finance: Analyzing Financial Statements & Ratios

This report provides a comprehensive analysis of applied business finance, covering the concept and importance of financial management, the explanation and uses of financial statements, and the application of ratio analysis to assess a company's profitability, liquidity, and efficiency. It includes a business review template, an income statement, and a balance sheet, all prepared in Excel. The report uses a case study to illustrate how businesses can improve their financial performance through effective marketing strategies, resource allocation, and inventory management. It concludes that sound fiscal administration, proper cost allocation, and strategic decision-making based on financial ratio analysis are essential for enhancing a company's efficiency and overall financial health.

Applied Business
Finance

Contents
INTRODUCTION...........................................................................................................................3
SECTION 1......................................................................................................................................3
Describe and explain concept and importance of financial management....................................3
SECTION 2......................................................................................................................................4
Explanation of Financial statement and it uses............................................................................4
SECTION 3......................................................................................................................................6
(i) Prepare Business Review Template........................................................................................6
ii) Complete the Income Statement using excel..........................................................................6
(iii) Prepare the balance sheet in excel........................................................................................7
(iv) With the help of case study explain profitability, liquidity and efficiency of the company. 7
SECTION 4......................................................................................................................................9
With the help of case study discuss and explain the process business might use to improve
their financial performance..........................................................................................................9
CONCLUSION .............................................................................................................................10
APPENDIX....................................................................................................................................12

INTRODUCTION
Financial management is the primary aspect of every business. New start-up business or
already established business both needs Financial management. It comprises of applying
Management principles to the fiscal assets. Financial Management is the strategic planning,
controlling, directing and organising (Clement and Silvernagel, 2019). The following report
includes the importance of financial management and the uses of financial reports in the
organisation. Ratios are calculated to identify the different aspects of a business concern.
Companies performance of the organisation is compared and analysed from the final reports of
the current accounting year as well its previous performances. These analyses also help in
determining the market share of the company.
SECTION 1
Describe and explain concept and importance of financial management.
Financial management can be explained as a process which helps to plan, organize, direct
and control activities related to monetary terms in a company. It facilitates implementation of
management principles and play an essential role in forecasting the long term success of business
projects. It can be defined as an area which focuses on earning profits, reducing expenses and
losses, increasing cash flow in an organisation. It focuses on achieving and completing its goal
on time. It also helps to add value to the business, expand the working and operations and
facilitate innovative ideas to be applied for better functioning.
Importance of financial management:
1. Increase profitability of business: Financial management as the name suggests is
focused with managing of funds and choosing alternative course of action from the
options available. Business is more focused with earning profits as it will help in growth
and expansion too (Kujawski, 2021).
2. Add value to business: It helps to add value i.e. growth of business which as a result
would help in business expansion too. It helps to plan more accurately as what could be
done, how could be done. What actions would help organisation in a positive way and
how can it benefit it in long run.

3. Motivate employees to save money and plan funds accordingly: Financial
management helps employees to understand the importance of saving money and put that
to best possible uses. It helps employees to perform better in comparison to past
performances.
4. Allocate scarce resources to best possible uses: It helps to allocate the limited resources
to places which would result in maximum profitability by choosing from best alternatives
available with the company (Surace and Bovsunovsky, 2020).
5. Helps to minimize costs: It helps to manage costs and understand what could be the
causes which led to increased costs and how it can be reduced for better working and
sustainability in the market.
SECTION 2
Explanation of Financial statement and it uses.
Financial statements are records which signifies the financial health of an organisation.
Financial reports help to reflect true and fair view of the accounts of the company. For achieving
organisational goals, it is mandatory to inspect the statements of an enterprise. There are majorly
three types of financial statements which can be elaborated as given below-
 Cash flow statement- It is a statement which reflects the net cash flows of an enterprise.
It shows all the inflows of an organisation. Cash flow statement is majorly divided into
three categories: cash flow from operating activities, investing activities and financing
activities. Cash flow from operating includes all the activities related to business and
adjustment for working capital is also shown in operating activities. Investing activities
include purchasing and selling of non-current assets. Financing activities encompasses
issuing and redemption of shares and debentures. This shows the flow of cash in an
organisation (He, Chen and Hu, 2019).
 Income statement – It helps to know about the expenses and earning of an organisation.
It consists of cost of goods sold, sales and all the operating expenses incurred during an
accounting year. Net profit will be calculated by using profit and loss account.
 Balance sheet – It shows the total assets and total liabilities; an organisation owns at the
time of verifying accounting records of an enterprise. Assets are further classified into

current and non-current assets like machinery, debtors and fixtures. Liabilities include
trade payable, bill payable and long term loans.
Importance of ratios in financial management
A financial or accounting ratio is used to measure relative change or comparison of
financial performance between two firms. Significance of ratios can be explained as given
below-
1. Helps to determine profitability - Return on assets and return of equity are the key ratios to
get the sight about profitability. This ratio gives the information about how much investor's
money is used by an organisation. Gross profit and net profit margin reflects the ability of an
enterprise to convert sales into profits (Komarova and et.al., 2019).
2. Identify financial risk of an enterprise - Ratios such as leverage and interest coverage ratio
aids in knowing the risk of external nature. It is occurred due to borrowing of debts by an
organisation.
3. For planning and forecasting future – Financial record are used by the stakeholders to know
about the working of an enterprise. By interpreting ratios, an organisation can know the
deviations and take corrective measures to correct the same. Further planning can be made
according to the current performance and also forecast the future trends (Marett and Bazin,
2020).

SECTION 3
(i) Prepare Business Review Template.
ii) Complete the Income Statement using excel.
In Appendix.

(iii) Prepare the balance sheet in excel.
(iv) With the help of case study explain profitability, liquidity and efficiency of the company
Profitability Ratio: It is used to examine company's capabilities to earn profit in
comparison to its expenditure. It presents the final result of a business and if its financial position
is sound or not and if its market image is competent with relation to its competitors (Vernimmen,
Quiry and Le Fur, 2022). Some important profitability ratios are: Gross profit margin, return on
equity, Net profit margin, Return on assets.

Interpretation: The above calculated ratios represent percentage of profit in relation to
revenue incurred by taking in account operating and non-operating expenses. Gross profit can be
explained as remaining portion of funds from the revenue and net profit margin means the
percentage of income earned after cost from revenue. Gross profit is 42.76% and net gain is
22.7, which highlights profit percentage decreasing by 20 approx. The company requires to
reduce their overhead costs which is blocking the business from earning more profit. It is
necessary for investors to compare their company's profits with competitor's in the same line. It
helps them to know their exact financial position and performance in the market.
Efficiency Ratio: This ratio provides an idea of how well a company is managing its funds,
assets and liabilities. It highlights how fast company is in collection of payment from customers
and how long it would take to cover and pay debts and calculate the asset and equity turnover
(Verreynne and et.al., 2019). The ratios helpful in such operations are Asset turnover, receivable
turnover, stock turnover and account payable turnover ratio.
Interpretation: Customer on an average takes approximately 51 days to cover their debts
whereas creditors take 52 days to collect their payments. Therefore, the company would pay and
cover debts and their due payments almost in same time frame. It might result in limitations too
because if the receivable cycle day declines it might result as a hurdle for the organisation and
there is quite less difference in the days observed. The inventory turnover is 3.8 which states that
investment in stock flow quarterly in a year i.e. for 4 times. The total asset turnover recorded is
1.23 which clearly shows that the firm Is performing well so far and generating enough funds at
the end of year which would help business to sustain in the market.

Liquidity ratio It explains a firm's capability to cover its debt and increase its assets and
generate more funds. It also helps to calculate solvency of the company. These ratios are based
on current liabilities, stock and current assets and can only be calculated with the help of such
ratios. The main ratios are current and quick ratios.
Interpretation: The ratios so far calculated gives business an idea about liquidity of a company.
Ideal ratio defined is 2:1 and quick ratio considered is 1:1. It can be seen that the current asset in
reference to liability is 2.22 which explains that the company is solvent. After removing the stock
from current asset, quick ratio resulted is 1.47 which states that organisation has enough
capability to cover and pay its liabilities & debts.
SECTION 4
With the help of case study discuss and explain the process business might use to improve their
financial performance.
Financial Performance: It is a method which helps a company to earn profits &
revenues with the help of assets. It also gives an idea of financial health of an organisation for a
given period of time i.e. whether sound or not, whether favourable or not. Financial performance
can be explained with the help of certain factors such as ownership, age, liquidity and size.
Financial [performance also gets affected from factors such as productivity, leverage, solvency
and asset turnover. There are certain calculations done and certain financial ratios which help the
managers and business to take correct action:
 Rise in net profit is observed by 126.77% the reason being non- operating cost such as
interest and administrative expenses has decreased (Wang and et.al., 2020).
 Customer satisfaction has improved due to which investment has increased and support
towards firm's growth is also rising. It has also resulted in employee sustainability in
organisation too.

 The current asset to current liabilities recorded to decline by 82% in comparison with
previous year, which means outflow of cash is more and company's liquidity is
declining.
 Shareholder's equity is increasing, sell of shares has also taken an upward direction i.e.
increasing, decline in operating expenses, rise in revenues.
Improvements that must be taken in account are:
1. Effective marketing strategies: These can be applied for improving the working of
organisations and lower down the costs with the help of utilization of resources which
help to increase revenues and profits. It can be done with the help of digital marketing
which would help to keep costs low and reach maximum number of people in less time.
2. Allocation of scarce resources: It helps to allocate resources from the best alternative
possible and make the best use of it. It will as a result increase productivity and improve
working of the business (Wasiuzzaman and et.al., 2020).
3. Increase in inventory turnover and reduction in inventory would help to fulfil working
requirements.
CONCLUSION
It can be concluded from the above report that the Fiscal administration is one the
essential parts in a business concern. It helps the business organisation in proper allocation of
cost. The use of financial ratio helps in determining the profitability also the decision – making
improves by doing an analysis from the calculation of ratios. So, for this some of the ratios were
calculated which depicts that the firm is doing good but just needs to lower down its operating
expenses which can also lead to increase in its efficiency. At the end, some of the strategies that
can help the company in enhancing the fiscal productivity is define by managing the funds and
allocation of the costs appropriately.

REFERENCES
Books and Journals
Clement, T. and Silvernagel, C., 2019. A conceptual framework of entrepreneurial
finance. Entrepreneurship Education and Pedagogy. 2(4). pp.308-332.
He, Y., Chen, C. and Hu, Y., 2019. Managerial overconfidence, internal financing, and
investment efficiency: Evidence from China. Research in International Business and
Finance. 47. pp.501-510.
Komarova, A. and et.al., 2019. Organisational educational systems and intelligence business
systems in entrepreneurship education. Journal of Entrepreneurship Education. 22(5).
pp.1-15.
Kujawski, D., 2021. A damaging function ΔKd for analyzing FCG and R-ratios in metallic
materials. Theoretical and Applied Fracture Mechanics. 116. p.103091.
Marett, J. and Bazin, O., 2020. COVID-19 and Commodity Trade Finance: The Way
Forward. Com. L. World. 34. p.12.
Surace, C. and Bovsunovsky, A., 2020. The use of frequency ratios to diagnose structural
damage in varying environmental conditions. Mechanical Systems and Signal
Processing. 136. p.106523.
Vernimmen, P., Quiry, P. and Le Fur, Y., 2022. Corporate finance: theory and practice. John
Wiley & Sons.
Verreynne, M.L. And et.al., 2019. Innovation diversity and uncertainty in small and medium
sized tourism firms. Tourism Management. 72. pp.257-269.
Wang, F. and et.al., 2020. Big data analytics on enterprise credit risk evaluation of e-Business
platform. Information Systems and e-Business Management. 18(3). pp.311-350.
Wasiuzzaman, S. and et.al., 2020. Creditworthiness and access to finance of SMEs in Malaysia:
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Development.

APPENDIX