The present report is developed for conducting discussion of the concept of financial management and explanation of the use of ratios. This is followed by completing the information on the given business review template, income statement and balance sheet. Lastly, the given case study information is sued for carrying out profitability, liquidity and efficiency ratio analysis of the company and providing recommendations to improve its financial performance.
The concept of financial management can be stated as strategic planning, directing and controlling the financial activities of an organization. It is known to be an important aspect of business management concerned with effective use of capital resources for carrying out business operations (Schmidlin, 2014). The major objectives of financial management within an organization can be stated as follows:
The scope or importance of financial management within an organization is limited to taking adequate financial decisions for maximizing the shareholder interests that are stated as follows:
The financial statements are the reports that depicts the financial position of a company. They can be stated as written records developed for illustrating the business activities and financial performance of a company. The major type of financial statements is described and discussed as follows:
1. Completing the Information on the ‘Business Review Template (Ensure that you display your calculations for this detail)
The Net Profit for the year 2016, is £43,057,000 (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 (continuing operations) |
189,711 |
179,587 |
+5.6% |
|
Profit for the financial year |
43,057 |
18,987 |
+126.8% |
|
Shareholder’s equity |
83815 |
63,057 |
+32.9% |
|
Current assets as % of current liabilities |
222% |
304% |
-82% |
|
Customer satisfaction |
4.5 |
4.1 |
+10% |
|
Average number of employees |
649 |
618 |
+5% |
Turnover from continuing operations increased by 5.6% during the year, primarily due to the acquisition of the Extinguishers business on 1 May 2015, which made a full years contribution in 2016.
Gross Profit = £81125
Net Profit = £43057
Net Profit increased in 2016 by 126.8% during the year.
Shareholders’ equity increased by 32.9% by £20758.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities) is 1.47:1
The company’s “current ratio” (Current Assets divided by Current Liabilities.) is 2.22:1
Change in profit for the financial year = (43057-18987)/18987 = 126.8%
Current Assets as % if current liabilities = 84349/37928 = 222%
Shareholder’s equity increased by (83815-63057) = 20758
Quick Ratio = (Current Assets – Stock) / Current liabilities
For year 2016 = (84349-28571)/37928 = 1.47:1
Current Ratio = Current Assets / Current Liabilities
For year 2016 = 84349/37928 = 2.22:1
Using Excel producing an Income Statement for the Sample Organisation (see Case Study)
This is included within appendix
Using Excel completing the Balance Sheet
Attached in Appendix
Using the Case study information describing the profitability, liquidity and efficiency of the company based on the results of ratio analysis
Gross profit = 42.76%
Net profit = 22.70%
The gross profit of the company is 42.76% which means that it is realizing adequate profit before deduction of the interest and tax payments. It is making good profit before deduction of the cost of goods sold. The gross profit margin ratio of the company is higher and therefore it can be said that its profitability position is healthy. The net profit ratio of the company is also higher that is 22.70% which means that it has attained good net profit in comparison to the operating expenses. The company’s effectiveness in generating profits can be regarded as it has realized adequate profitability in comparison to sales and operating expenses (LLC and Rist, 2014).
Current Ratio = 2.22:1
Quick Ratio = 1.47:1
The current ratio of the company is 2.22:1 that means it has sufficient current assets in comparison to the current liabilities. Also, the quick ratio for the company is also higher than 1 that is 1.47: 1 which means that it has sufficient quick asset base that includes cash and cash equivalents to meet the short-term financial obligations. The company liquidity position is strong as its current as well as quick ratio is more than 1which means that there does not exist any financial risk for meeting the current liabilities that is due within a year (Beyer, 2014).
Total assets turnover ratio = Revenue / Total Assets
= 189711/153647
= 1.23 times
Account Receivables turnover ratio = Revenue / Account Receivables
= 189711 / 26367
= 7.19 times
The assets turnover ratio of the company is 1.23 times which means that it is having higher efficiency in generating revenue or sales. The company is effective in generating sales from the use of its asset base. Also, the accounts receivables turnover ratio of the company is 7.18 which is sufficiently high meaning that is effectively collecting the debts towards the credit extended. This means that efficiency position of the company is good as it is having efficiency in use of its asset base as well as collecting debts from the customer (Follett, 2011).
Reduction of the Operating Expenses: The company need to focus on reduction of the operating expenses for maintaining increase in the net profit position of the company.
Recovering Outstanding Payments: The company need to focus on collecting debt in timely manner for ensuring maintaining good cash position and minimizing the risk of default.
Reduction of the Prices: The company need to focus on minimizing the prices for improving the financial position by increasing the sales or revenue position for the customers (Bens and Young, 2018).
Conclusion
It can be stated from the overall discussion held in the report that financial management is largely important within a company to maintain adequate financial control and stability. The case study has depicted that the given company has maintained good profitability, liquidity and efficiency position.
References
LLC, P. and Rist, M. 2014. Financial Ratios for Executives: How to Assess Company Strength, Fix Problems, and Make Better Decisions. United States: Apress.
Follett, R. 2011. How to Keep Score in Business: Accounting and Financial Analysis for the Non-Accountant. United Kingdom: Pearson Education.
Beyer, S. 2014. International Corporate Finance – Impact of Financial Ratios on Long Term Credit Ratings: Using the Automotive Examples of BMW Group, Daimler Group and Ford Motor Company. Germany: GRIN Verlag.
Schmidlin, N. 2014. The Art of Company Valuation and Financial Statement Analysis: A Value Investor’s Guide with Real-life Case Studies. Germany: Wiley.
Birchall, A. 2014. Financial Analysis and Control: Financial Awareness for Students and Managers. United Kingdom: Elsevier Science.
Bens, D. A. and Young, S. 2018. Corporate Financial Reporting and Analysis: A Global Perspective. United Kingdom: Wiley.
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