Applied Business Finance Assignment Sample

Applied Business Finance Assignment

Section 1

a. Definition of financial management

Financial management is the process of planning and controlling financial transactions to make efficient procurement. Moreover, utilization of organizational funds to make effective results for the organization is the aim of financial management. Financial management consists of four types of financial analysis being considered in financial management. Investment decision-related financial management calculates the investment-related financial activity (Asandimitra et al. 2019). This financial activity produces results on investment to make a higher return for making profitability. The financing decision is the second approach of financial management where profit and sales volume are being analyzed to make financial decisions. Further making decisions on production and administrative expenditure helps to reduce the cost of products or services to ensure more profitability in the next FY. Additionally, working capital has been calculated in financial management where arranging sufficient working capital to continue business operation easily. The dividend is the part of profitability that has been distributed to shareholders where financial management has decided about dividend rate for shareholders. Financial management has considered cash, expenditure, and credit sales to evaluate the financial condition of a company. Maximization of the company to provide a positive return to shareholders is another process of financial management.

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b. Importance of financial management in the context of financial sustainability in the organization

Required capital calculation: Through the financial management professional financial practitioners have decided about the capital structure of the organization. Financial professionals using the expected profit ratio and operational activity decide about the expected capital required in this organization. Excessive funds have been collected from issuing shares for other investors.

Playing of capital structure: After making estimates about required capital, the management has decided about the "debt to equity" ratio for ensuring profitability in business operation. Identification of long and short-term debts is being evaluated by financial management (Zietlow et al. 2018). Through this analysis financial management has project capital structure: what will be capital of owners and rest of percentage capital has been raised by issuing shares. This projection of capital structure reduces debts volume and financial management has played an important role.

Profit allocation: The incorporation of the organization has reported a financial statement after one year of complementation. Those financial reports analysis has delivered a plan for innovation and expansion that would generate more possibilities for the organization. Excessive profit balance has been declared as dividend for shareholders where financial management has decided the percentage.

Further capital investment plan: Investment of capital is important to ensure sustainability in the organization where financial management plays a role to implement the return on investment. Through calculating return management, we become able to make further plans for business growth. Positive return through investment increases the surplus volume that has encouraged investors for more investment.

Financial control: financial management not only focuses on financial results and another activity. This management also monitors financial activity to protect farms from unwanted financial disasters (Broyles, 2020). Moreover, this encourages employees to concentrate on wastage which indirectly adds surplus in profitability. Through controlling financial activity ratio analysis of the organization highlights strengths and weaknesses where financial management delivers advice for improvement.

Section 2

a. Discussion of financial statement

Financial statements have been produced by management at the end of each financial year. In those financial reports, the situation of the organization and future goals are being included to maintain transparency. Financial reports conclude with different dossiers like “balance sheet”, ``profit and loss statement”, “cash flow statement’ and“statement of shareholders equity”. Discussion of financial statements, cash flow has presented about present cash availability in the organization. Cash flow is the summarized financial dossier that holds cash in and out flow-related transactions. The overall cash balance of the company has been considered as the financial strength for further business expansion. Additionally, the net cash balance of a company has the capability to pay all debts. Moreover, this statement also reflects how much investment comes in the organization has also shown about different types of expenditure.

Additionally, a P&L statement project about the profitability or loss of a company after each financial year. This statement presents about tax expense and reserve that has been provided about expenses of the company (Das et al. 2020). Moreover, the tax amount presented is about how tax has been paid by the company. Additionally, the net profit of the company shows the ultimate profit of the company.

Furthermore, a balance sheet has been presented by financial managers to establish the liabilities and assets of a company. The current assets of the company are inventory, cash, trade receivable all are parenting about short-term financial conditions (Klein, 2018). Moreover, non-current assets are derived from tangible and intangible assets. On the other side, liabilities have presented about equity, total debts, and creditors. Another statement on shareholders' equity includes changes in equity holders and how much dividend is paid to the investors. Through this statement, users are getting information about changes in certain changes in equity formation. The balance equity has come from this statement. Stakeholder’s equity could be calculated through subtraction of liabilities from the assets.

b. Discussion of the use of ratio analysis of the financial statement

Ratio analysis of a company has drawn about the different financial facts. In addition, the profitability analysis of an organization simplified the profit of the company. Comparing different years financial reports present a profit margin ratio that clearly shows the profit change in those years. Through presenting different years profitability has compression financial performance (Rahmawati, 2020). ‘Gross profit margin ``compares profit before tax and interest to understand increasing or declining gross profit. Mover, “Net profit margin” highlights the net profit differences in consecutive years.

Moreover, using efficiency ratio management understands about the “trade receivable turnover ratio” management understands how much time is required for collecting credit sale amount. Similarly, in “trade payable turnover ratio” is being calculated about the capacity to pay the credit purchase. Those ratios help to understand how time is required for working capital. This time calculation is useful to manage financial liquidity. Through turnover analysis including assets, it provides assets involvement in sales that has a need to move for huge sales volume. Increment of sales volume over total assets helps financial professionals to understand asset requirements for further growth in sales volume.

Implementing ratio analysis helps to make it knowable for users to understand the real facts of the company. In this calculation of liquidity, the "current ratio" evaluates current assets quality against the current liabilities that make a view on the capability to tackle current liabilities. Higher current liabilities would raise problems for further business operations where higher current assets volume presents possibilities to make short-term financial liquidity (Rahmawati, 2020). Additionally, “quick ratio” inventory has been eliminated from the current assets that would present core financial liquidity for evaluating the capability to daily business operations. Through using those ratios investors and financial professionals set plans for investment and select financial activity to improve financial growth.

Section 3

Calculation of P&L and balance sheet

As per the calculation of the P&L statement, the company's net profit was £18,987,000 in 2015. Additionally, the net profit of the company came out around £ 43057000 representing a change in net profit of 126.77%. The gross profit of the case study related company is £ 81125000. The calculation of shareholder equity of 2016 has presented £47447000. Those are financially also included in ratio analysis. Collecting data regarding gross and net profit helps to understand the change in profitability compared with FY 2015. Moreover, presenting balance sheet total equity of the company is £ 83,815000 for FY 2016. The current assets of the company are 84,349 and non-current assets are 69,298. On the other hand, current liabilities are 37,928 and non-current liabilities are 23,810. The balance sheet of the case study presents an overall comparison of assets and liabilities. [Refer to the appendix]

Describe the profitability, liquidity, and efficiency of the company based on the results of ratio analysis

Table 1: Profitability ratios

(Source: Created by the learner)

Table 2: Liquidity ratios

(Source: Created by the learner)

Table 3: Efficiency ratios

(Source: Created by the learner)

Analysis of profitability of the company, “gross profit margin” considered to present operating profit. The accounting ratio of GP margin follows the rule that is “(gross profit / revenue) X 100” (Pratama et al. 2022). The GP margin is 42.8 percent which is sufficient for financial growth. This positive growth in GP margin presents the company with strong operating control in production. Further net profit margin analysis, the company has generated 22.7 percent. Around a huge percentage of NP margin attracts investors. “(Net profit / revenue) X 100” following this formula net profit and sales considered in this calculation (Sari et al. 2018). Return percentage from assets the company has gained 28 percent that could be considered as a sustainable return. Moreover, through the equity how to return gained by the company has been calculated for making out investors gain. In this context, The Company generates 51.4 percent return from equity.

Evaluating the current ratio the company has more current assets than current liabilities. In this situation, the company current ratio is 2.22 that means current assets of the company are 2.222 times higher than current liabilities (Simamora et al. 2019). The quick ratio of the company where inventory has to be deducted from the current assets where results come out as 1.47. According to this result management maintains a high quality quick ratio that helps the company to liquidate financially. 

Through analyzing the efficiency of the case study regarding company “trade receivable turnover ratio” is 7.2 that means on a year basis total stock has been rotated 7.2 times as credit sales. On the other hand, “trade payable turnover ratio” is 9.73 that also provides information about credit purchase of the company. Management has required 9.73 times to pay credit purchase related payments.

Section 4

Describe and discuss the processes this business might improve financial performance

Making financial reports and ratio analysis it could be recommended that the company profitability and liquidity both are sufficient for business growth. Those positive results help management to maintain short and long term sustainability. High percentage of profit margin ensures huge profitability in next FY year. As well as sustainable liquidity ratio management would be able to manage cash balance through daily business operations. As per case study comparing profit with previous FY the company gain would impress investors for further investment. Moreover, extreme profit management could be used for business expansion. In efficiency ratio management needs to implement different strategies because low assets turnover ratio would be the reason for future deficit in assets (Hariani et al. 2020). Management could increase the production facilities and would be able to meet more consumers that will generate more sales. Increasing sales volume would be more effective to make “assets turnover ratio”. Moreover, the longtime taken to pay the credit purchase amount that reflects the organization has problems with working capital where management needs to focus on collecting credit sales quickly. Through collecting those credit sales amounts would increase the cash input in the organization that would increase the working capital.

Reference list

Ali, M., Dianita, M., Hadian, N., Aryanti, M. and Wahyuningsih, N., 2020. Financial Performance Analysis Based on Profitability Ratio (Study at PT Astra International Tbk Period 2009-2018). International Journal of Psychosocial Rehabilitation, 24(02), pp.3474-3481.

Asandimitra, N. and Kautsar, A., 2019. The influence of financial information, financial self efficacy, and emotional intelligence to financial management behavior of female lecturer. Humanities & Social Sciences Reviews, 7(6), pp.1112-1124.

Broyles, J., 2020. Financial management and real options.

Das, S. and Pandit, S., 2020. Financial Statement Analysis and Forecasting. Equity Markets, Valuation, and Analysis.

Hariani, E. and Febriyastuti, R., 2020. The effect of fiscal stress, original local government revenue and capital expenditures on efficiency ratio of government independence performance. JurnalEkonomidanStudi Pembangunan, 12(1), pp.18-25.

Klein, A., 2018. Discussion of “Financial Statement Comparability and the Efficiency of Acquisition Decisions”. Contemporary Accounting Research, 35(1), pp.203-210.

Pratama, M.I.S., Aji, T.S. and Witjaksono, A.D., 2022. Analysis of the Effect of Profitability Ratio, Solvency Ratio, Market Value Ratio, Inflation, and Exchange Rate on Stock Return (Case Study of the Agriculture Sector on the IDX from 2016 to 2019). International Journal of Multicultural and Multireligious Understanding, 9(3), pp.166-175.

Rahmawati, I.Y., 2020. The Effect of Profitability Ratio, Liquidity Ratio, Leverage Ratio, and Company Size on Sukuk Rating Corporation During 2014-2017 Periods. In SHS Web of Conferences (Vol. 86, p. 01027). EDP Sciences.

Sari, R.K., Nurlaela, S. and Titisari, K.H., 2018, August. The effect of liquidity ratio, profitability ratio, company size, and leverage on bond rating in construction and real estate company. In PROCEEDING ICTESS (Internasional Conference on Technology, Education and Social Sciences).

Simamora, R.A. and Hendarjatno, H., 2019. The effects of audit client tenure, audit lag, opinion shopping, liquidity ratio, and leverage to the going concern audit opinion. Asian Journal of Accounting Research.

Zietlow, J., Hankin, J.A., Seidner, A. and O'Brien, T., 2018. Financial management for nonprofit organizations: policies and practices. John Wiley & Sons.