Financial Statement Analysis: Assessing and Improving Performance

This report provides a detailed analysis of financial management's importance, focusing on financial statement analysis and ratio calculations. It covers various financial statements, including the balance sheet, income statement, cash flow statement, and change in equity statement, explaining their significance in evaluating a company's financial health. The report includes a business review template with financial data from 2016, assessing profitability, liquidity, and efficiency using key ratios. Furthermore, it suggests strategies for improving business performance, such as recovering outstanding payments, selling unused assets, and implementing effective marketing strategies. The analysis demonstrates how understanding and managing financial resources can lead to enhanced profitability and stability, with practical examples and calculations provided to illustrate key concepts.

Importance of financial
management

Table of Contents
Section 1................................................................................................................................................3
Introduction.......................................................................................................................................3
Section 2................................................................................................................................................4
Various types of financial statement and the use of ratio analysis.....................................................4
Section 3................................................................................................................................................6
i) Business review template...............................................................................................................6
ii) Income statement of 2016.............................................................................................................8
iii) Balance sheet of 2016..................................................................................................................8
iv) Describe business profitability, liquidity and efficiency from the above data......................10
Section 4:............................................................................................................................................10
Ways to improve Business performance.......................................................................................10
Conclusion..........................................................................................................................................12
References...........................................................................................................................................13

Section 1
Introduction
Managing the financial resource is important for each and every organisation. Financial
management means planning, organising and controlling the funds of the organisation so that
financial activities can be done in cost effective manner. All the company invest their money
to hire those profession list who are good enough that with the help of their skills and
knowledge can manage their funds. In this procurement and allocation of funds in very
effective way so that each resource can be utilised in the best manner. Organisation manage
their financial assets so that they can enhance their profit margin to the fullest (Shapiro and
Hanouna , 2019).
Importance of financial management is as follow:
 It helps the company in making their plan which are related to finance.
 Allocation of resources from various sources are also identify with the proper
management of finance.
 It also helps the organisation to make that tough financial decision.
 With proper financial management the company also able to allocate the funds in
different department.
 It also helps the organisation to enhance their profit
 Paying of tax amount is decided by the financial statement.
 It also helps the business by providing the economical stability (Naranjee, Sibiya and
Ngxongo, 2019).
This report will helps in defining and explain what the importance of financial
management . This report also covers the various type of financial statement that are
needed by the company and the ratio analysis.

Section 2
Various types of financial statement and the use of ratio analysis
Financial statement is a process which organisation uses to formally record all the
financial activities that are taken place in the business in an accounting period.
This is used by the company so that with the help of this they can see their financial
performance of the accounting year there are four types of financial statement which
every company makes for their business . These are as follow:
A) Balance sheet: Balance sheets show the financial position of the company on a particular
date. It is used to provide detailed information of the assets, liabilities and shareholder equity
of the company. This is also called as statement of financial position. The items which are
cover in the assets and liabilities side are reported in order of liquidity. This means that the
item which has high liquid position are come first and then with less liquid items. It also used
by the company so that they can provide the snap shot of the organisation finance. Here the
total of assts side should be equal with the total of liability and shareholder equity side
(Brigham and Houston, 2021).
B) Income statement: An income statement is that financial statement which helps the
organisation in knowing the revenue that company earns over the period. This is used by the
company to know the net profit that they earn after paying all the taxes and interested. This
statement is considered as the important financial statement as it help in knowing the overall
performance of the company. This is also known as profit and loss account. In this all the
expenses which company occur over the time periods is deducted from the amount that is
received after the sale of goods and services (Agwu, 2018).
C) Cash flow statement: Cash flow statement is used by the company to know the actual
inflow and outflow of cash and cash equivalent on a specific period. This is important for the
company to make this report so that they can know that what amount of cash they hold in
their hand so that they can pay the expenses and can invest in procuring of some assets. This
cash flow statement is used by the company so that they can the amount of cash that they
need to generated for their operation. It is divided in three pats that is operating activities,
investing activities and the financing activities ( Hung, 2018).

D) Change in Equity statement: This report is created by the organisation so that they can
know what all changes are made of equity and shares. This statement is used to know the
purchase and sale of equity that company make during the time. While this statement is nor
being used by the company the other statement are being issued internally.
Uses of ratio Analysis in financial management
Ratio analysis is based on the information if past and present financial data so that an
evaluation of financial statement can be made and the performance of the company can be
obtained. So below are the reason why ratio are used by the company.
Comparison: Ratio analysis is used by the business so that they can compare their financial
performance from the same industry and can know their market position. This is used so that
they can extract the market gap and then with the help of this they can earn competitive
advantage (Shim, and et. al, 2019).
Decisions making: Ratio that the company calculate such as liquidity ratio, solvency ratio,
profitability etc., are used by the organisation so that they can make financial decision and
then improve their position. With the help of this the enterprise get to know their actual
status and can make strategy planning for them.
Trend line: Organisation uses the ratio so that they can see whether there is a trend in their
financial performance or not. So the business collect their data from various year and then try
to determine what is the trend that is happening from the past years. This trend is obtained so
that they can forecast their future performance. This trend is used so that if any threats that
occur can identified and company can take action against that ( Haried, 2021).
Operational efficiency: The use of ratio analysis also helps the company to extract the
degree of efficiency in managing the assets and liabilities. Financial ratio is based on
quantitative data so this is also used by the company to know whether their resources are over
utilised or underutilized in very effective way. So with the use of ratio company can allocate
their resources in best way (Hoerl and Snee, 2020).

Section 3
i) Business review template
The Net Profit for the year 2016 ,is £?
(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 189711 17587 5.6
Profit for the
financial year
43057 18987 127
Shareholder’s
equity
83802 63057 +32.9
Current assets as %
of current liabilities
2224% 304 % -8..2
Customer
satisfaction
4.5 4.1 +10
Average number of
employee
649 618 +5
Turnover from continuing operations increased by 5.6% during the year, primarily due
to the acquisition of the Extinguishers business on 1May2015, which made a full years
contribution in 2016.
Gross Profit = £ 81125
Net Profit = £ 43057
Net Profit increased in 2016 by 127% during the year.
Shareholders’ equity increased by32.9% by £ 20745.
The company’s “quick ratio is 1.47:1
The company’s “current ratio” is 2.22:1
WORKING NOTE FOR EACH CALCULATION ARE:

1) Profit for the year is = 43057 – 18987
= 24070
Profit for the financial year = Sales- COGS- operating expenses
= 189711- 108586 – 38068
= 43057
So the profit percent will be = (24070 / 18987)*100
= 127%
2) Shareholder equity = 63057 * 32.9
=20745
So 630570 + 20745 = 83802
3) Gross profit = Turnover – direct operation cost
= 189711 – 108586
= 81125
So Gross profit percent will be = (Gross profit / sales )* 100
= (81125/189711) * 100
= 42.8 %
4) Net profit = Gross profit – non operating expenses
= 81125 – 38068
= 43057
Net profit percent = (Net profit/ Sales) * 100
= (43057 / 18971) *100
= 22.7%
5) Current ratio = Current asset / current liabilities
= 84349 / 37928
= 2.22:1
6) Current assets %of current liability = Current ratio *100
= 2.22* 100
= 222%
6) Quick ratio = Quick assets / current liability
= 55778 / 37928
= 1.47:1

ii) Income statement of 2016
2016
Turnover 189711
Less cost of sales:
Material Cost 42597
Production Cost 15231
Labour Cost 50758
108586
Gross profit 81125
Less Expenses:
Administrative
expenses
13751
Other operating
overheads
22374
Interest 1934
Total Overheads 33068
Profit/(loss) for the
financial year
43057
iii) Balance sheet of 2016
Balance sheet as at 31 December 2016
2016
£ 0
Non current assets
Intangible assets 5793
Tangible assets 52812
Investments 10693
62298

Current assets
Stocks 28571
Trade debtors 26367
Short term deposits 14779
Cash in hand and bank 14632
84349
Total 146647
Current Liabilities
Bank loans 9610
Trade creditors 19493
Other creditors 678
Income tax payable 3585
Other creditors including tax and
social security
4562
37958
Working capital 46421
Total assets- current liabilities 115719
Non current liabilities
Bank loans and overdrafts 16506
Other liabilities 7304
Provisions for liabilities 8094
31904
Net assets 83815
Called up capital 399436
Reserves 1322
Retained Earnings 43057
Total equity 83815
iv) Describe business profitability, liquidity and efficiency from the above data
With the help of the data from the business review template the calculation and

the ratio analysis of the following are as follow:
 Business profitability:
From the data it is being observed that there is an increase of 27% in profit from
2015 to 2016 . In 2015 the profit is 18987 and in 2016 it is 43057. This shows that
the business id growing and developing to its full potential. The company gross
profit is 42.8% and the net profit is 22.7%. This shows that for every £1 sale the
company earn £ 42.8 and if operating expenses is deducted then they earn £ 22.7
on it.
 Business Liquidity:
Liquidity position of the company is extracted by the current ratio and quick ratio.
In the current data the company current ratio is 2.22:1 and the quckk ratio is
1.47:1. This means that company hold £2,22 of assets on every £ 1 of liabilities
and if the stock is deducted then they hold £ 147 assets for £1 liabilities.
 Business efficiency:
Assets turnover of the company for every £1 is 2.226£. this indicate that the
organization is investing it money in more effective way and the owner will get
226% return on it.
It is also been noted that the company need only 05 days to replace itt stock
and it need only 72 days to pay the debts and can recover their amount in just
54 days from their creditors.
Section 4:
Ways to improve Business performance
Recover the Outstanding payment: One of the way through which organization can
improve their performance is by recovering their outstanding payment quickly. This is
done when on the regular basis the company reminds their debtors about their obligation.
Also, when the sale is made clearly defining the payment date (Campisi and et . al , 2019).
Sell of unused assets: Holding unnecessary assets is not good for the business. So the
organization need to sell their long period assets so the risk of depreciation of value be
reduce. This will also give cash to the company on instant basis.

Marketing strategy: The organization should also use te concept of marketing mix. It is
based on 4p’s which are product, price, place, promotion. So will help the organization
to interact with their consumer on efficient manner. In fact strategy like accountability
and innovation can also help the organization to improve their business performance.
(Rodrigues and Rodrigues, 2018).
Other strategies: Company can also improve their short term financial system like they
can make their credit control system tight, can reduce their inventories level so all the
fund that are invested in this can be used in other purpose. (AREAS, 2018).

Conclusion
From this report it is concluded that financial management plays a vital role in the
organization. All the activities and operation of the company are linked with the
finance. If this is not properly mange then company may face the problem of loss.
However it is also been conclude that financial statement is made by the organization
so that they can review their performance and can take steps to improve it.