ATHE

FINANCIAL MANAGEMENT
Assignment
Prepared By
Jipsa Jose ATHE Student Number:483389

.....................................................................7 Solution.........................................................................................................4 Gearing Ratio...........................................................................................................................................................................2 Introduction........................................................................................................................................................................................................10 2 ......................3 Task-1 Profitability Ratio.................................................................4 Task-2 Investment Appraisal.................................................................................................................................................................................6 Ratio summary table of Flow Ltd Company......5 Solution to the problem of overtrading...............................................................................................................3 Efficiency Ratio ........Table of Contents Table of contents.............................................................................................................................................................................................................................................................................................................................................................................................................5 Conclusion........................................................................3 Liquidity Ratio....................................7 References..........................................................4 Conclusion..................................

Earnings per share indicate profitability of Flow Company from each share. Task-1 Profitability Ratio Gross profit margin and net profit margin are used for measuring profitability of the company. and working capital etc for the establishment of the industries.Introduction The modern age is the age of industrialization. Finance has a crucial role for building. Stock turnover period and credit payment period elicits an increasing trend from year one to year two. Financial management is the managerial activity which is concerned with the managerial activity which is concerned with the planning and controlling of the firm’s financial resources.27 respectively. The low profit margin elicits a low margin of safety. In 3 .33p respectively. The gross profit margin and net profit margin of Flow ltd Company shows a decreasing trend from year one to year two .57 and 1. Financial ratios are help to analyse the level of performance of a company. And also it used for internal comparison of the company. It shows a slight increase from year one to year two that is . On the contrary Return on capital efficiency shows a slight increase from year one to year two specifically 0. year 1 Flow Ltd shows higher performance compared to year 2 because only 19 days it takes to sale its products. According to J F Bradley(2005) ‘’ financial management is the area of business management devoted to the judicious use of capital and careful selection of resources of capital in order to enable a spending unit to move in the direction of reaching its goal’’ This assignment focuses on comparing the performance level of Flow Ltd in two years.32p and .17. what are the sources of capital and how it will be invested is the matter of financial management. creditor’s payment period is less in year1 that is 47 days but it increases in year 2 is 49 days. It is an unworthy situation of the company because on these days company is through the overdraft money from the bank. Large industries are being established in every country. Similarly. In this case. in year2 the company takes 32 days to sale their products.The differences is 1. plant. How much capital will be required. It compares earning with capital invested in the company. It means that in year two flow company shows higher performance compared to year 1. On the contrary. Efficiency Ratio Efficiency ratio is used to analyse how well a company uses its assets and liabilities internally.

63 respectively. 4 .93 and 0. But it is important to note that in these years current liability is higher than their net assets. year one is more risky than year two because long –term debt ratio is higher in year one than its capital. Gearing Ratio Gearing ratio Analyses Company’s long-term debt compared to its equity capital. Increase in sales depict a positive signal to the company but company should make sure that whether the sales is on credit or not. On the contrary. in year 2 the company’s current liability is higher than their current assets. Certainly increase in overdraft. stock.42. It means that. But in contrast return on capital employed.contrast. acid test or quick ratio also shows declining trend from year1 to year2 that is 0. By way of reducing cost of sales and liability flow company can improve their performance. The higher ratio is the more risky to the company. It is important to note that these changes are only at reasonable level. In year 1 current ratio shows positive trend to the company that is 1. in year one Flow Ltd shows a better performance compared to year two. Compared to these two years. earning per share and gearing elicits a positive trend in year two. In year 1 company takes 51 days to collect its debt money but in year 2 companies take 49 days to collect their money. It explains that the current assets are higher than their current liabilities. net profit margin.03.78. Conclusion In general.08 and 14. stock turnover period. debtors and overdraft shows an upward movement. In these two years sales. Similarly. In year one gross profit margin. credit payment period. debtor’s collection period is higher in year1 and it diminishes in year2. stock and debtors designate worthless situation of the flow ltd company because those days company is running through the credit money. Liquidity Ratio Liquidity ratio expresses a company’s capacity to repay short-term creditors out of its total cash. the gearing ratio indicates an upward trend from year 1 to year two that is 19. current ratio and acid test ratio indicates an efficient situation of the company. In other words company have ability to recover their liability through liquid cash. in year 2 the current ratio shows a diminishing movement that is 0. Here.

Investment is related to saving or deferring consumption. Company can concentrate much on strength and weakness of its competitive position. Investment Appraisal On the basis of two year experiences flow ltd cannot go for further investment. The company faces the problems like an upward trend of sales. (III) Encourage automated payments It should be encouraged over more traditional methods like sending cheques by post. stock. If the new terms are unattractive or aggressively imposing to them then there is chance to lose its business. debt and overdraft. In finance. boosting cash flow and reducing bad debts. Solution to the problem of overtrading Efficient debt management and credit control helps to avoid overtrading. an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. This is usually leads to enormous accounts payable or accounts receivable and a lack of working capital to finance operations. Moreover managing debt more effectively and improving cr-+edit control. Overtrading is the situation in which a company is growing it sales faster than it can finance them. using systems such as Bank Automated Clearing System(BACS) or Automated Payment 5 . company should change some of their business practices. There is a disadvantage that it can be expensive and must be policed to ensure that customers only take discounts when they pay promptly. (ii) Offer discounts for prompt payment It can be effective by way of accelerating payment. This is by way of ensuring that it get paid well and have the cash to pay suppliers and staff. (i) Set new payment terms Company could negotiate payment terms or tell customers that new terms will apply for future orders but the company should aware that the customers may object.Task-2 Investment is the responsibility of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest. income or appreciation of the value of instrument. The main reason is that company faces the problem of overtrading. Therefore company need to make sure that customers understand how much they need to pay and when they must settle up.

Conclusion Financial ratio analysis helps to appraise Flow ltd in terms of their liquidity. missing or lose cheques and have the advantage of payment certainty. Faster stock turnover means that there will be a very short interval between the time that the company have to pay to their suppliers and the time that the customers pay to the company for the same goods. (v) Negotiate payment terms with company’s supplier Company will try to negotiate different payment terms with its suppliers.Scheme(CHAPS) will protect from risk of bounced. If they are not up to date they are liable to face the risk of making promises they cannot keep to customers. (iv) Use factoring or invoice discounting Factoring includes selling the company’s invoices to a specialist finance company which takes on the administration and cost of recovering the invoice payments. (vi) Improve company’s stock control Everyone includes retailers. 6 . Longer payment methods are unethical. profitability and overall performance. Businesses are also entitled to charge interest on its late payment. So company need to find that some supplier refuse to supply if the company is usually take too long to pay. If the customers of the company are paying their bill on time then company can pay their suppliers at right time. By way Of invoice discounting. The company should ensure they don’t run out of key items. manufacturers and service providers need to have accurate and up to date lists of what they do and do not have stock. company raise a loan from a finance company against the value of the company’s invoices. gearing. efficiency. but company have the responsibility and cost of recovering invoice payments. In addition to this it helps to locate and point out the various areas which need the management attention in order to improve the situation and also it assist an organisation to take suitable decisions. Therefore company want to consider to giving something in return for extended payment terms like promise of regular orders.

9 In year 2 Gross profit margin= 1124.98% 21% 32 days 49.31 days 51.60% 14.25 Net profit margin in year2= 300.98 7 .Ratio Summary of Flow Ltd Company Ratios Profitability ratio  Gross profit margin  Net profit margin  Return on capital employed Efficiency ratio  Stoke holding period  Creditor’s payment periods  Debtor’s collection periods Liquidity ratio  Current ratio  Quick ratio Gearing ratio  Capital gearing ratio  Debt or equity ratio Investors ratio Earnings per share Additional ratio analysis  Increase sales  Increase or stock  Increase Debtors  Increase creditors Year 1 68.93:1 16.78:1 0.83% 19 days 47.60% 39.90% 19.39 (b) Net profit margin= net profit/ sales*100 Net profit margin in year1=260.25% 20.37 days 1.08% 31.20% 11.03% 19. 000*100 =19.000/1668.000/1350.42% 33. 000/1668.03:1 0. 000*10 = 68.33% Solution (I) Profitability Ratio (a) Gross profit margin= Gross profit sales *100 In year 1 Gross profit margin= 930.39 days 0.30% Year 2 67. 000 * 100 =67.64:1 12.000/1350. 000*100 =17.67% 24% 118.95 days 46.39% 17.

00 (d) Earnings per share(EPS)=Net profit after tax/number of shares Earnings per share in year1=190.000*365 =32.000/600.37days Debtor’s collection period in year 2=212.20days (b) Debtors collection period= Trade debtors/credit sales *365 Debtor’s collection period in year 1=190.000 =0. 000*100 =21. 000*365 =51.33p (ii) Efficiency ratio (a) Stock turnover period= Average stock/cost of sales* 365 Stock turnover period in year1= 22.03 Current ratio in year 2=260.000=0.83 Return on capital employed in year2=300.000/1350.000*365 =49. 000*100 =20.(c) Return on capital employed= Net profit before interest and tax/capital employed*100 Return on capital employed in year 1=260.000/600.000/1428.000/432.000/420.000 = 1.11days Stock turnover period in year two= 48.000/204.94 days (iii) Liquidity (a) Current ratio=current assets/current liabilities Current ratio in year 1=212.000/544.000/1668.000/332.000/570.31 days Creditors payment period in year 2=78.000 8 .000/1248. 000*365 =46.000 *365 =19.9 days (c) Creditors payment period= trade creditors/credit purchases*365 Creditors payment period in year 1=56.32p Earnings per share in year2= 200.000*365 =47.

63 (iv) Gearing Debt/equity ratio= Debt (long-term debt)/equity*100 Debt ratio in year 1=200.debtors in year 1)/debtors in year 1*100 = (212000-190000)/190000*100 = 11.000/1048000*100 = 19.78 (b) Acid test ratio or quick ratio= current assets.000/204.=0.08 Debt ratio in year 2=180.stock/current liabilities Quick ratio in year 1= 190.000 =0.000-22000)/22000*100 = 26000/22000*100 =118.overdraft in year 2)/overdraft in year 1*100 = (154000-78000)/78000)*100 =97.000/332.93 Quick ratio in year 2= 212.42 Increase in stock= (stock in year 2.000/1248000*100 = 14.stock in year 1)/stock in year 1*100 (v) Increase in stock= (48.57 (viii) Increase in overdraft =(overdraft in year 2.000 = 0.43 9 .18 (vi) Increase in sales =(sales in year 2-sales in year 1)/sales in year 1*100 = (1668000-1350000)/1350000*100 =23.55 (vii) Increase in debtors=(debtors in year 2.

http://www.Bhattacharyya 3.htm 9.com/Help/liquidity-ratio-112. http://www.investopedia.com/terms/e/efficiencyratio.asp 12.businesslink.com/finance/m3b3. http://www.asp 3.com/terms/e/eps.htm 10.References Books 1. http://www.html 11.investopedia. http://www.uk/bdotg/action/detail?itemId=1073791134&type=RES OURCES 14.investopedia.gov.scribd.asp 4.asp 7.com/terms/i/investment.asp 6. http://www.investopedia.com/terms/o/overtrading.financescholar.com/doc/15596371/Final-Project-Report-on-Financial-StatementAnalysis 10 . Financial Accounting for Business Managers.Bob Ryan 2. http://www. http://www.com/return-capital-employed.co.html 5.com/terms/g/gearing.uk/advice-and-support/finance/bookkeeping-creditmanagement/how-to-improve-your-stock-control/?q=advice-andsupport/finance/bookkeeping-credit-management/how-to-improve-your-stock-control/ 13. http://www. http://www.investopedia.advfn.Asish K.D K Kolitz A.bizmove.investopedia.com/gross_profit_ratio.asp 8. A Concepts Based Introduction to Financial Accounting.clearlybusiness.B Quinn Websites 1.com/terms/g/gearingratio.mbaknol. http://www. Financial Accounting for Business.com/financial-management/financial-management-definitionand-its-features/ 2. http://www. http://www. http://www.accountingformanagement.

11 .

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.