BMP3005 Importance of Financial Management Assignment Sample

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Introduction

Financial management implies for the process of planning, raising, managing and controlling funds of the business entity. This method supports in managing the organization’s stability by maintaining a balance between the overall income and expenses. FreshGo is concentrating over expanding its product in the line of organic food product which helps in enhancing the overall organizational sales and profitability (Description of FreshGo, 2023). However, firm is facing issue in managing its overall operational cost which leads significant impact on its profitability. The current report is based on identifying the profitability position of FreshGo and suggesting effective measures for enhancing the firm’s performance. For students looking for help in assignment writing, understanding this financial management approach can provide valuable guidance.

Main Body Section 1

1. Purpose of financial statement and it influence on stakeholder

Financial statement implies for the formal record of firm’s transactions which aids in summarizing the company’s overall monetary health and performance over the specific period (Adhinata, Darma and Sirimiati, 2020). Cash flow, income statement, balance sheet and statement of equity are the four broad type of financial statement. Major purpose of preparing financial statements is as follows:

BMP3005 Importance of Financial Management Assignment Sample

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• This statement provides information regarding procurement and usefulness of various resources of the company.
• Financial statement also aids in determining the position of economic resources such as liabilities & owner’s equity and depicts changes in the all resources over time (Purpose of financial statements, 2024).
• It also aids in determining the long term stability of organization by providing information related to the firm’s liquidity, profitability and solvency position.

Role of financial statement in stakeholder’s decision

Following is the role of financial statement in taking the informed decision by various stakeholders:

• Financial statement supports in providing information related to the organization’s efficiency which aids in taking the accurate actions on timely basis. (Almaleki, Salehi and Moradi, 2021)
• This statement helps in depicting the overall liquidity and cash flow position of company which helps creditors in taking the informed decision while providing credit.
• Moreover, financial statement helps investors in identifying growth potential of the company based on which rational investment decision could be initiated.

2. Risk and return trade off and its significance

Risk and return trade off indicates a positive relationship between the risk and return of an investment (Arda, 2021). This concept articulated that an investor is likely to earn higher amount of return by investing in the highly riskier option. Below mentioned are the various importance’s of risk and return trade off:

• This method helps investors in effectively managing their risk by understanding relationship between risk and return. This assists them in taking decision regarding investment after evaluating the current risk of portfolio.
• Moreover, this metric supports in boosting the overall return by taking into account the calculated risk which helps in increasing the overall earnings (Celestin and Vanitha, 2020). This metric facilitates the creation of diversified portfolio which helps in reducing the scope of loss and supports in increasing the overall return.
• This principle also helps in describing the expected amount of risk that an investor will face by investing in particular investment. This helps in taking effective decision after analysing the investor’s abilities of risk tolerance.

Section 2: Computation Of Financial Statement And Financial Analysis

A) Income statement calculation

• Computation of Profits
• (Enclosed in appendices)
• Interpretation:

Income statement is a financial report which provides information related to the overall revenue, expenses, gains and losses of the business entity during a period (Chuah, Kamaruddin and Singh, 2020). It includes numerical representation of the firm’s income and expenses which aids in identifying the overall profit and loss of the company.

Gross profit: This element indicates total revenue of the company after deducting the cost of production. FreshGo is earning gross profit of 227500 pound which is 65% of the total sales that indicates the effective profit margin of the company.

Operating profit: This includes profit after deducting all the operating expenses such as rent, salaries, sales, utilities and legal charges. FreshGo is having very high operating expense as 79% of total gross profit is used to pay out all such expenses (De Villiers and Sharma, 2020). Firm is having very high repairs and staff cost which result into reduction in the overall profits of the business entity.

Net profit before tax: This element includes organization’s profit after deducting all interest obligations from the operating profits. FreshGo is having net profit after tax of £43000 as a sum of 3800 pound is used to pay out the interest obligations.

Net profit: FreshGo is paying out 25% of total net profit before tax for fulfilling their tax liability. Therefore, after paying out all the tax liabilities and expenses, firm is earning a sum of 32250 pound. 

B) Computation of Balance sheet

• Computation of Financial statement
• (Enclosed in Appendices)
• Interpretation:

Statement of financial statement or Balance sheet contains information related to assets and liabilities of the company at a specific period of time (Folajinmi and Peter, 2020). This statement provides information related to what company owns and what it owes to other. Balance sheet is prepared with an aim to assess the firm’s abilities in paying out obligations and to understand the financial status of business entity. This statement also helps in identifying the firm’s ability to pay dividend and supports in determining the overall liquidity and solvency position of the company. There are three crucial components in balance sheet which includes assets, liabilities and equity. Below is the in-depth evaluation of balance sheet of FreshGo:

Assets: It includes all the resources that are owned and controlled by the company which helps in providing the future benefits. FreshGo is having current assets of £279000 and non-current asset of £1165000 denoting effective market presence and adequate financial stability. Moreover, FreshGo is having cash balance of 96000 pound which helps in easily paying out all liabilities.

Liabilities: This section includes information related to the entire obligation which firm needs to pay in longer and shorter time period (Gupta et al, 2020). FreshGo has taken the long term loan of 450000 pound and current liabilities of 103500 which is fewer in comparison to the assets indicating effective financial position of company.

Equity: This section depicts amount of capital invested by the owners & shareholders of the company. FreshGo has issued share worth of £775000 and has retained earning of 40500 pound.

FreshGo capital structure includes less amount of debt as compared to equity which aids in managing the overall cost and expenses of the company. Further, firm is having adequate working capital which assists in easily carrying out the routine expenses and support the working of the business entity successfully.

C) Ratio analysis

Calculation of ratio analysis

(Enclosed in appendices)

• Interpretation:

 Ratio analysis is the quantitative method which helps in determining the firm’s overall efficiency, liquidity, profitability and solvency position. Evaluation regarding FreshGo‘s overall financial health has been discussed below:

Profitability position:

For determining the profitability position of FreshGo, operating profit and ROCE ratio has been calculated. There is an increase in the firm’s operating profit margin by 1% which denotes efficiency in managing overall expenses. Further, it has been depicted that FreshGo is having optimum financial strategy which aids in adequate utilization of shareholders’ funds (Harman and Bernawati, 2021). This indicates adequate profitability position of FreshGo which helps in maintaining the long-term stability in the industry.

Liquidity Position:

FreshGo is having effective current and quick ratio which denotes organization’s efficiency in paying out all its obligations. Company is having current ratio of 2.88 which indicates the firm’s concern towards maintaining high liquidity position. However, very high ratio denotes inaccurate investment towards the current assets which restrict company to generate the higher profits. Moreover, FreshGo have invested huge amount in stocks which leads to holding the funds (Hayden, Mattimoe and Jack, 2022). Firm should lay emphasis over managing adequate liquidity ratio so that excessive funds could be used in a productive manner which helps in gaining the better return. Company should use adequate inventory management system which aids in avoiding the situation of overstocking and thereby ensures optimum utilization of the funds.

Solvency position:

It has been identified that in the current year, FreshGo is able to reduce its inventory days by 12 days which denotes increasing demand for company’s goods and services. This is the positive indicator as reduction in the inventory days helps in increasing the firm’s sales which leads improvement in the overall financial position (Indrawan and Damayanthi, 2020). Further, company should concentrate on modifying its pricing strategy so that the large number of customer could be attracted. Moreover, entity should lay emphasis over social media marketing which helps in creating awareness within the larger target market and meanwhile leads reduction in the number of inventory days.

D) Horizontal analysis

Computation of horizontal analysis

(Enclosed in Appendices)

Interpretation

Horizontal analysis is the financial analysis method which used for evaluating the firm’s performance over the time by comparing the similar items for multiple times (Jackson, 2022). It has been determined that FreshGo’s net income has been increased by 20%, revenue by 16% and gross profit by 16% which indicates the high efficiency of firm in attracting the numerous customers. Further, company has focused over reducing its debt and liabilities which leads to 10% reduction in the interest obligation. However, firm should concentre over introducing automation which helps in reducing the expenses related to salaries and wages.

Section 3

Profitability position of FreshGo

Profitability is the financial matrix which indicates the firm’s efficiency in converting overall expenses into profits. Profit margin is the most common measurement of profitability which helps in identifying the amount of sales that used to paying out the cost and percentage that saved for the future expansion (Mang'ana, Ndyetabula and Hokororo, 2023). Each firm focuses on setting up adequate profit margin as very low profit will create issue in managing long term stability within the industry and very high margin creates issue in attracting the cost- conscious customers. Organization generally emphasises over setting adequate margin so that firm’s cost could be covered while managing the needs of customers. Following is the description of profitability position of FreshGo:

After calculating operating profit ratio, it has been identified that firm is capable in increasing its profits by 1% in year 2024 indicating efficiency in managing overall expenses. This indicates FreshGo’s capability in converting sales into profit by effectively managing expenses and cost (Uwah, Aji and Iniabasi, 2023). Additionally, it has been depicted that FreshGo is having effective strategies which help in optimum utilization of resources for generating revenue. There is a 2% rise in the firm’s ROCE which is positive indicator for the investors as it depicts the long-term growth and stability of the business entity.

• Measures to rise profitability position:

There is large number of strategies and measures which should be adopted by FreshGo with the aim of enhancing it overall profitability position:

• Manager of FreshGo should focus on establishing regular L&D session which helps in enhancing the worker’s efficiency and supports in reducing the operational cost. Moreover, highly efficient worker are capable in optimally utilizing the resources which leads to higher profits.
• Company should also focus on modifying its marketing strategy which helps in creating awareness within the larger target market and aids in boosting the overall sales and profitability (Yogasnumurti, Sadalia and Irawati, 2021). Moreover, this will help in reducing the cost of product by attaining the economies of scales which further leads higher profit margin.
• Manager should also focus on improving the inventory management system which aids in reducing the level of inaccurate investment towards stocks and supports in using funds for generating the higher profit (Le and Gregoriou, 2020). Further, under stocking will result into incapability in fulfilling the needs and wants of customer leading to decreasing overall sales.
• Company should modify its debt- equity structure and focus on equity funds which aids in reducing interest obligation and support in enhancing overall profits of the business entity.
• Further, automation should be introduced in FreshGo which will reduce cost and help in carrying out operation with utmost efficiency leading to enhances overall financial position.

Conclusion

By summing up the report, it has been determined that financial statement play a crucial role in determining overall financial position of business entity. This statement supports in creating awareness regarding firm’s liquidity, solvency and profitability position which help in taking informed decision by all stakeholders. FreshGo is having net profit margin of 9% which result in earning sum of 32250 pounds. It has determined FreshGo is having very high liquidity ratio which creates obstacle in gaining optimum return. In this regard, firm should concentre on adopting adequate inventory management system, improve marketing strategy and reform its pricing strategy which helps in enhancing overall profitability status.

References

Books and Journals

• Adhinata, B., Darma, I.K. and Sirimiati, N.W., 2020. Good village governance in financial management to create independent village: Study of Pecatu village government. Soshum: Jurnal Sosial dan Humaniora, 10(3), pp.334-344.
• Almaleki, M., Salehi, M. and Moradi, M., 2021. The relationship between narcissism, managerial overconfidence and comparability of financial statements of listed companies. Journal of Facilities Management, 19(5), pp.681-700.
• Arda, D.P., 2021. Perceptions of Micro, Small and Medium Entrepreneurs on the Importance of Fair Presentation of Financial Statements with the Implementation of SAK EMKM as a Moderation Variable. Journal of Economics and Business, 4(1).
• Celestin, M. and Vanitha, N., 2020. The hidden costs in your financial statements: What you're overlooking. International Journal of Computational Research and Development (IJCRD), 5(2), pp.34-41.
• Chuah, S.C., Kamaruddin, J.N. and Singh, J.K., 2020. Factors affecting financial management behaviour among university students. Malaysian Journal of Consumer and Family Economics, 25(7), pp.154-174.
• De Villiers, C. and Sharma, U., 2020. A critical reflection on the future of financial, intellectual capital, sustainability and integrated reporting. Critical Perspectives on Accounting, 70, p.101999.
• Folajinmi, A.F. and Peter, A.O., 2020. Financial management practices and performance of small and medium scale poultry industry in Ogun State, Nigeria. Journal of Finance and Accounting, 8(2), p.90.
• Gupta, V.K., Mortal, S., Chakrabarty, B., Guo, X. and Turban, D.B., 2020. CFO gender and financial statement irregularities. Academy of Management Journal, 63(3), pp.802-831.
• Harman, S.A. and Bernawati, Y., 2021. Determinant of financial statement fraud: Fraud Pentagon perspective in manufacturing companies. Review of International Geographical Education Online, 11(4), pp.554-566.
• Hayden, M.T., Mattimoe, R. and Jack, L., 2022. Sensemaking and financial management in the decision-making process of farmers. Journal of Accounting & Organizational Change, 18(4), pp.529-552.
• Indrawan, A.S. and Damayanthi, I.G.A.E., 2020. The effect of profitability, company size, and financial leverage of income smoothing. American Journal of Humanities and Social Sciences Research, 4(2), pp.9-13.
• Jackson, A.B., 2022. Financial statement analysis: a review and current issues. China Finance Review International, 12(1), pp.1-19.
• Mang'ana, K.M., Ndyetabula, D.W. and Hokororo, S.J., 2023. Financial management practices and performance of agricultural small and medium enterprises in Tanzania. Social Sciences & Humanities Open, 7(1), p.100494.
• Uwah, U., Aji, I.A. and Iniabasi, E., 2023. Accounting ratios and false financial statements detection: evidence from Nigerian quoted companies. AKSU Journal of Administration and Corporate Governance (AKSUJACOG), 3(1), pp.61-75.
• Yogasnumurti, R.R., Sadalia, I. and Irawati, N., 2021. The effect of financial, attitude, and financial knowledge on the personal finance management of college collage students. In Proceedings of the 2nd Economics and Business International Conference-EBIC (pp. 649-657).

Online

• Description of FreshGo. 2023. Online. Available through: < https://find-and-update.company-information.service.gov.uk/company/SC452494>
• Purpose of financial statements. 2024. Online. Available through: < https://www.accountingtools.com/articles/what-is-the-purpose-of-financial-statements.html >