Managerial Finance Report: Ratio Analysis and Budgeting Techniques

This managerial finance report delves into key aspects of financial management. It begins with an introduction to managerial finance, emphasizing its role in decision-making and strategic planning. The report then proceeds to calculate and interpret various financial ratios, such as gross profit margin, net profit margin, current ratio, quick ratio, gearing ratio, return on capital employed, inventory turnover, and asset turnover, using data from H&M. Furthermore, the report explores the impact of non-financial information on managerial decisions, highlighting the importance of social and sustainability information. The report also examines budgeting techniques, differentiating between fixed and flexible budgeting, and outlining their respective uses. Finally, it contrasts management accounting with financial accounting, explaining their distinct purposes and audiences. The report concludes with a discussion on sources of finance.

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Managerial Finance

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Contents
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
a). CALUALTION OF RATIOS................................................................................................3
b). INTERPREATAION OF RATIOS.......................................................................................5
c). IMPACT OF NON FINACIAL INFORMATION................................................................5
QUESTION 2...................................................................................................................................6
A. Uses of budget........................................................................................................................6
B. Difference between fix and flexible budgeting......................................................................7
C. Difference between management and financial accounting...................................................8
QUESTION 4...................................................................................................................................9
a). CALCLUATION OF PAYBACK PERIOD..........................................................................9
b). CALCULATION OF ACCOUNITNG RATE OF RETURN...............................................9
c). RECOMMENDATION OF PROJECT.................................................................................9
d). SOURCES OF FINANCE AVAILABLE...........................................................................10
CONCLUSION..............................................................................................................................10
REFRENCES.................................................................................................................................11

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INTRODUCTION
Managerial finance is a field of finance which concern itself with the significance of finance
technique in managerial aspects (Gitman, Juchau and Flanagan, 2015). It is an approach which
is interdisciplinary which borrows from both corporate finance and managerial accounting. It
helps the managers to take necessary decisions for the company to take competitive advantage
over its competitors and improve its financial positions. It provides an aid to monitoring and
implementation of business strategies which help mangers to achieve its business objectives. The
following report contains the financial ratios which help mangers to take decisions. This report
also consists of the various budgeting techniques used by mangers to prepare the budgets. It also
explains the difference between financial accounting and management accounting. This reports
also contains the details of the various financing methods and different sources of finance
available with the companies.
QUESTION 1
a). CALUALTION OF RATIOS
Financial ratio: Financial ratio are the key indicators of the various financial
performance of the company which are usually derived from the company’s three statements
which includes balance sheets, income statements and cash flow statements (Coles, Lemmon and
Meschke, 2012). These ratios are used by the top level management to analyse company’s
liquidity, profitability and its financial stability. Following are some financial ratios which help
companies to check their stability:
 Gross profit margin: It is a metric which is used by the company to assess its business
model and financial health by showing the total amount of money which is earned by the
company sales after deducting the cost which a company incurred in manufacturing that
product.
 Net profit margin: Net profit margin is the profit which is generated by company’s
operations. It shows the percentage of revenue generated by its operations after adjusting
its both direct and indirect expenses. It is also called considered as a company’s bottom
line. It is usually determined in the percentage form or decimal.
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 Current ratio: The current ratio is a liquidity ratio which helps mangers to find out the
company’s ability to pay off its short term liabilities which are due within the one year. It
also tells the investors and analyses that how a company can maximize its current assets
to satisfy their current liabilities.
 Quick ratio: It is an indicator used by the companies to find out the company’s short
term liquidity position (Park and Jang, 2014). It helps managers to measure the
company’s ability to meet their short term obligations which they can meet with its most
of its liquid assets. It indicates the company’s ability to quickly convert its assets into
cash.
 Gearing ratio (Debt/equity): Gearing Ratio is considered as a broad category of
financial ratios. Accountants, investors, lenders and company executive uses the gearing
ratios in order to measure the relation between the debts and the owner’s equity.
 Return on capital employed: ROC is a financial ratio which measures the company’s
profitability and its efficiency to which company uses its capital. Return on Capital
Employed is a ratio which measures that how well a company can generate profit from its
capital which is employed by the business owners. It is considered as an important ratio
in determining the profitability and is also used by investors while screening for suitable
investments.
 Inventory turnover: Inventory turnover is a ratio which shows the company that in a
given period of time how many times a company has replaced its inventory and sold its
goods. It also helps the company to find out the average time required by a company to
sell its inventory (Parkinson, 2012). It helps mangers to meaning full decisions on
manufacturing, purchasing, marketing and pricing its new inventory.
 Asset turnover: This is a ratio which helps companies to find out the value of company’s
sales which is directly relative to the value of its assets. Assets turnover is used as a
efficiency indicators by company for the assets which is used to generate revenue.
Following are the calculation of all the ratios of a H & M
2016 2017
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Gross profit margin= Gross profit/revenue 60.30% 61.30%
Net profit margin= Sales/net profit 6.90% 8.36%
Current ratio=
Current assets /current
liabilities 1.36 1.59
Quick ratio=
quick assets/current
liabilities 0.54 0.59
Gearing ratio (Debt/equity)= Debt/Equity 0.71 0.55
Return on capital employed= Net profit/capital employed0.31 0.35
Inventory turnover= COGS/Average Inventory 2.86 2.71
Asset turnover=
Net sales/Average total
assets 2.29 2.26
b). INTERPREATAION OF RATIOS
From the above calculation it can be interpreted that company’s gross profit margin for the
year 2017 is 61.30% percent where as in the year 2016 it showed 60.30% which shows that the
company is operating well in the past year and achieved its market position by increasing its
gross profit margin. The calculation also shows the company net profit margin for the year 2016
was 6.90% where in the year 2017 it was stated as 8.36% which shows that company has
improved its profit margin and showed a growth. It also shows the current and quick ratio as 1.59
and 0.59 for the year 2017 respectively and for the year 2016 it was states as 1.36 and 0.54
respectively. It also shows the assets turnover for the year 2016 as 2.29 and for the year 2017 it is
stated as 2.26. This shows a significant downfall in the company’s profitability ratio.
c). IMPACT OF NON FINACIAL INFORMATION
Non financial information are the information’s which are used by the mangers to check the
environment and take necessary decisions in order to achieve the market growth and sustain its
positions (Degiannakis, Floros and Livada, 2012). There are various types are financial
information which are used by mangers to take effective decisions, some of these are as follows:
 Social Information: Social information is used by the manger to make the decisions.
With the help of the social information available with the mangers they can make policies
which can help in social development of the society.
 Sustainability information: Sustainability projects which are produced by a variety of
tools and decision approaches which focuses on the sustainability metrics and indicators.
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This information is required by the mangers to take decisions in order to improve the
company’s sustainability in the market and improve its financial position.
QUESTION 2
A. Uses of budget
Budget: It is an estimation of incomes and expenditures for a future period in order to
reduce possibility of losses and issues such as lack of financial resources (Chen, Yang and Lin,
2012). It is detailed financial plan which is based upon past years data and carry information for
future. Managers distribute budget to all the functional departments of the company so that they
can operate all the business activities in appropriate manner. Main purpose of formulating
budgets to allocate monetary resources properly, form plans, facilitate coordination, control
activities of employees and motivation them. It is tool which is used by top executives in process
of decision making, monitor actual and budget performance and estimate future incomes and
expenditures that may take place in upcoming period. With the help of effective and efficient
budgeting limited resources can be managed in an appropriate manner. In other words, it can also
be defined as a plan to spend the monetary resources. The process of formulating this plan is
known as budgeting. In order to form it managers analyse various aspects such as studying
previous year’s data, determine future expenses and then formulate a budget. Afterwards it is
presented in front of top executives for their approval. When they approve it then it is
implemented within the company in order to manage all the money related activities. It is used
by organisation for different purposes. All its uses are as follows:
 Main use of budget is to track expenses of the company in which managers can figure out
that where the organisation has spent extra money. It helps to formulate effective
decisions for the purpose of controlling overspending of monetary resources. Keeping
detailed record can help to track expenditures in detail.
 Another use of budget is to limit spending of business entity. It helps to determine that
what amount of money is being spent by company on monthly basis and then formulate
plans to stop them.
 Budgets are formulated for the purpose of attain financial goals of organisation by
reducing unnecessary expenses and enhances funds for business activities (Caglayan and
Demir, 2014).
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 In order to build business wealth business entities, formulate budgets which helps to
spend money appropriately and control them properly and appropriately.
B. Difference between fix and flexible budgeting
Fixed budgeting: All the budgets that remain fix for accounting period are formulated
under fixed budgeting. Whether sales decrease or increases it remains the same throughout the
budget period (Khan, 2015). It is based upon assumptions of selling specific amounts of goods
during a period. These are based upon a set volume of revenues or sales of the company. In tis
type of budget income and expenditures are predetermined and any type of fluctuation is not
recorded in it.
Flexible budgeting: It is method which is used for the purpose of formulating flexible
budget. It can be changed with the fluctuation in the selling units or volume of sales or revenue.
It is more sophisticated and useful as compare to static budget because it can be adjusted
according to organisational situation (Bhattacharya and Londhe, 2014). It includes formulas that
adjust expenses that are based upon changes in actual revenues or other business activities.
Difference between Fixed and Flexible budgeting:
Fixed budgeting Flexible budgeting
Nature of this type of budgeting is always
static in which modifications cannot be made.
Flexible budgeting’s nature is dynamic in
which changes can be made.
The procedure of conducting fixed budgeting is
very easy and it can be used by unexperienced
employees.
Process of conducting flexible budgeting is not
easy it is slight tough and skilled and
experienced staff members are required to
conduct it.
Comparison in this type of budgeting is
difficult because the activities levels are
different at actual and standard level.
Comparison in flexible budgeting is very easy
because the activities level in this method is
quite easy.
Forecasting accurate results in this method is
very difficult.
Under flexible budgeting forecasting of
accurate results as it shows the clear impact on
operational aspect of business.
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C. Difference between management and financial accounting
Management accounting: The process of formulating management reports is known as
management accounting in which performance of a business entity can be analysed. It helps to
monitor, analyse, organise and control all the business activities in order to get accurate results
for future period. It helps the managers and other internal stakeholders to analyse that company
is performing well or not. It guides managers to form strategic decision for business so that
performance can be enhanced.
Financial accounting: Formulation of financial statement such as profit and loss
account, balance sheet and cash flow to analyse financial status of the company (Kelly and
Rivenbark, 2014). It guides external stakeholders to take decision regarding making investment,
supplying goods, buying products and providing credits. All these decisions are formulated by
investors, investors, suppliers, creditors etc. It guides them to measure financial viability and
stability of company.
Difference between management and financial accounting:
Management accounting Financial accounting
Managers conduct management accounting in
order to determine actual performance of the
company.
Financial analysts conduct financial reporting
for the purpose of analysing profitability,
liquidity, financial viability and stability in the
market.
Purpose of management accounting is to
provide information of business performance
to the internal stakeholders.
Main purpose of financial accounting is to
provide detailed information of finance to
external stakeholders of the organisation.
Financial data is not recorded in the books of
management accounting.
Only financial data is used by accountants to
formulate reports of financial accounting.
Management accounting is future oriented in
which plans for future are formulated.
Financial accounting is past oriented in which
performance of business is analysed with the
help of past year’s data.
Different types of management reports such as
account receivables, job costing, inventory
management etc. are formulated under
management accounting.
Different financial statements are created under
financial reporting which includes cash flow,
balance sheet and profit and loss account.
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QUESTION 3
a). Calculation of the budgeted production cost per unit
Income statement under ABC costing
Particulars X Y Z
Product units 23000 19500 18000
Direct material 644000 487500 396000
Direct labour 713000 663000 486000
Direct expenses 0 0 0
Prime cost 1380000 1170000 900000
Add: overhead cost driver rate
Machine Set up cost
95454.545
4545455
65454.545
4545455
139090.90
9090909
Material ordering costs 69750 42750 103500
Machine running costs
126237.62
3762376
84158.415
8415841
129603.96
039604
General facility costs
212413.36
6336634
141608.91
0891089
218077.72
2772277
Total costs
1883855.5
3555356
1503971.8
7218722
1490272.5
9225923
b). Comparative calculations using absorption costing method and ABC method
ABC COSTING X
Direct material 644000
Direct labour 713000
Direct expenses 0
Prime cost 1357000
Add: overhead cost driver rate
Machine Set up cost
95454.545454
5455
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Material ordering costs 69750
Machine running costs
126237.62376
2376
General facility costs
212413.36633
6634
Total costs
1860855.5355
5356
ABSORPTION COSTING X
Direct material 644000
Direct labour 713000
Direct expenses 0
Prime cost 1357000
Add: overhead cost driver rate
Machine Set up cost
114049.58
677686
Material ordering costs
82115.702
4793388
Machine running costs
129256.19
8347107
General facility costs
217492.56
1983471
Total costs
1899914.0
4958678
QUESTION 4
a). CALCLUATION OF PAYBACK PERIOD
Net cash
inflow (£
000) Project A Project B Project C
Year 1 80 100 60
Year 2 120 250 65
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Year 3 115 300 150
Year 4 110 300 175
Year 5 75 150 200
NPV $380.00 $820.96 $464.67
b). CALCULATION OF ACCOUNITNG RATE OF RETURN
Net cash
inflow (£
000) Project A Project B Project C
Year 1 80 100 60
Year 2 120 250 65
Year 3 115 300 150
Year 4 110 300 175
Year 5 75 150 200
ARR 425.25 950.2727273 450.5
c). RECOMMENDATION OF PROJECT
From the above calculation it can be recommended that project B can be used by the
company as the accounting rate of return is approx 950 where as the ARR of the project A is
approx 425 and for the project B is approx 450 so from the above calculation it can be
recommended that project B will give the maximum accounting rate of return on the project. For
the above calculation it can also be recommended that the payback period for project B is 820
where as the payback period for project A and project B are 380 and 464 respectively after
considering both the investment appraisal project B is the most recommended project for the
company. As the payback period and Accounting rate of return for the project B is greater than
other two projects.
d). SOURCES OF FINANCE AVAILABLE
There are various sources of finance available for the company to raise funds in order to
improve its efficiency and increase its financial position (Ganuza and Baiocchi, 2012). Some of
the sources of finances are described as under:
 Bank loan: This is a source of finance which is available by the company. They can take
loans from bank which are payable after a specified time, usually bank charges interest
on the money borrowed by the companies.
 Debenture: Companies can issue debenture to raise fund from various debenture holders
as they give money to the business for their operations or purchase new assets. Company
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has the liability to pay interest to these debenture holders usually fixed before issuing
these debentures.
 Equity share capital: companies can issue equity shares in the companies in order to
raise the funds to carry out its operations or acquire new assets. By issuing these share
companies give right to the share holders to take part in the decision making process in
the company. They are called as a owners of a company in return companies have to pay
dividends, it is not necessary for the companies to pay dividends every year.
CONCLUSION
From the above file it can be concluded that managerial finance plays an important in the
decision making process in order to survive in the market and sustain its market position. The
above report also establishes that the financial ratios are the important factor to determine the
financial positions of the company with the help of these ratios companies can find their liquidity
position and their ability to pay of its current liabilities with the help of current assets. It also
explains the various sources of the finance available for the company to raise its funds for
acquiring new assets and improving efficiency of its operations.
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