ATHE

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

Table of Contents

Table of contents........................................................................................................................2 Introduction................................................................................................................................3

Task-1
Profitability Ratio.....................................................................................................................3 Efficiency Ratio .........................................................................................................................3 Liquidity Ratio...........................................................................................................................4 Gearing Ratio.............................................................................................................................4 Conclusion.................................................................................................................................4

Task-2
Investment Appraisal................................................................................................................5 Solution to the problem of overtrading......................................................................................5 Conclusion..................................................................................................................................6 Ratio summary table of Flow Ltd Company.............................................................................7 Solution......................................................................................................................................7 References................................................................................................................................10

Introduction
The modern age is the age of industrialization. Large industries are being established in every country. Finance has a crucial role for building, plant, and working capital etc for the establishment of the industries. How much capital will be required, what are the sources of capital and how it will be invested is the matter of financial management. Financial management is the managerial activity which is concerned with the managerial activity which is concerned with the planning and controlling of the firms financial resources. 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. Financial ratios are help to analyse the level of performance of a company.

Task-1
Profitability Ratio
Gross profit margin and net profit margin are used for measuring profitability of the company. And also it used for internal comparison of the company. The gross profit margin and net profit margin of Flow ltd Company shows a decreasing trend from year one to year two .The differences is 1.57 and 1.27 respectively. The low profit margin elicits a low margin of safety. On the contrary Return on capital efficiency shows a slight increase from year one to year two specifically 0.17. It means that in year two flow company shows higher performance compared to year 1. It compares earning with capital invested in the company. Earnings per share indicate profitability of Flow Company from each share. It shows a slight increase from year one to year two that is .32p and .33p respectively.

Efficiency Ratio
Efficiency ratio is used to analyse how well a company uses its assets and liabilities internally. Stock turnover period and credit payment period elicits an increasing trend from year one to year two. In this case, year 1 Flow Ltd shows higher performance compared to year 2 because only 19 days it takes to sale its products. On the contrary, in year2 the company takes 32 days to sale their products. Similarly, creditors 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. In
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contrast, debtors collection period is higher in year1 and it diminishes in year2. In year 1 company takes 51 days to collect its debt money but in year 2 companies take 49 days to collect their money.

Liquidity Ratio
Liquidity ratio expresses a companys capacity to repay short-term creditors out of its total cash. In year 1 current ratio shows positive trend to the company that is 1.03. It explains that the current assets are higher than their current liabilities. In other words company have ability to recover their liability through liquid cash. On the contrary, in year 2 the current ratio shows a diminishing movement that is 0.78. It means that, in year 2 the companys current liability is higher than their current assets. Similarly, acid test or quick ratio also shows declining trend from year1 to year2 that is 0.93 and 0.63 respectively. But it is important to note that in these years current liability is higher than their net assets.

Gearing Ratio
Gearing ratio Analyses Companys long-term debt compared to its equity capital. The higher ratio is the more risky to the company. Here, the gearing ratio indicates an upward trend from year 1 to year two that is 19.08 and 14.42. Compared to these two years, year one is more risky than year two because long term debt ratio is higher in year one than its capital.

Conclusion In general, in year one Flow Ltd shows a better performance compared to year two. In year one gross profit margin, net profit margin, stock turnover period, credit payment period, current ratio and acid test ratio indicates an efficient situation of the company. But in contrast return on capital employed, earning per share and gearing elicits a positive trend in year two. It is important to note that these changes are only at reasonable level. In these two years sales, stock, debtors and overdraft shows an upward movement. Increase in sales depict a positive signal to the company but company should make sure that whether the sales is on credit or not. Certainly increase in overdraft, stock and debtors designate worthless situation of the flow ltd company because those days company is running through the credit money. By way of reducing cost of sales and liability flow company can improve their performance.

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. Investment is related to saving or deferring consumption. In finance, 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.

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, stock, debt and overdraft. The main reason is that company faces the problem of overtrading. Overtrading is the situation in which a company is growing it sales faster than it can finance them. This is usually leads to enormous accounts payable or accounts receivable and a lack of working capital to finance operations.

Solution to the problem of overtrading

Efficient debt management and credit control helps to avoid overtrading. This is by way of ensuring that it get paid well and have the cash to pay suppliers and staff. Moreover managing debt more effectively and improving cr-+edit control, company should change some of their business practices. (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. Company can concentrate much on strength and weakness of its competitive position. If the new terms are unattractive or aggressively imposing to them then there is chance to lose its business. (ii) Offer discounts for prompt payment

It can be effective by way of accelerating payment, boosting cash flow and reducing bad debts. There is a disadvantage that it can be expensive and must be policed to ensure that customers only take discounts when they pay promptly. Therefore company need to make sure that customers understand how much they need to pay and when they must settle up. (III) Encourage automated payments

It should be encouraged over more traditional methods like sending cheques by post, using systems such as Bank Automated Clearing System(BACS) or Automated Payment
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Scheme(CHAPS) will protect from risk of bounced, missing or lose cheques and have the advantage of payment certainty. (iv) Use factoring or invoice discounting

Factoring includes selling the companys invoices to a specialist finance company which takes on the administration and cost of recovering the invoice payments. By way Of invoice discounting, company raise a loan from a finance company against the value of the companys invoices, but company have the responsibility and cost of recovering invoice payments.

(v)

Negotiate payment terms with companys supplier

Company will try to negotiate different payment terms with its suppliers. Longer payment methods are unethical. So company need to find that some supplier refuse to supply if the company is usually take too long to pay. Businesses are also entitled to charge interest on its late payment. Therefore company want to consider to giving something in return for extended payment terms like promise of regular orders. If the customers of the company are paying their bill on time then company can pay their suppliers at right time. (vi) Improve companys stock control

Everyone includes retailers, manufacturers and service providers need to have accurate and up to date lists of what they do and do not have stock. The company should ensure they dont run out of key items. If they are not up to date they are liable to face the risk of making promises they cannot keep to customers. 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.

Conclusion
Financial ratio analysis helps to appraise Flow ltd in terms of their liquidity, gearing, efficiency, profitability and overall performance. 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.

Ratio Summary of Flow Ltd Company Ratios Profitability ratio Gross profit margin Net profit margin Return on capital employed Efficiency ratio Stoke holding period Creditors payment periods Debtors 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 68.90% 19.25% 20.83% 19 days 47.31 days 51.37 days 1.03:1 0.93:1 16.03% 19.08% 31.67% 24% 118.20% 11.60% 39.30% Year 2 67.39% 17.98% 21% 32 days 49.95 days 46.39 days 0.78:1 0.64:1 12.60% 14.42% 33.33%

Solution
(I) Profitability Ratio

(a) Gross profit margin= Gross profit sales *100

In year 1 Gross profit margin= 930,000/1350, 000*10 = 68.9 In year 2 Gross profit margin= 1124, 000/1668, 000 * 100 =67.39 (b) Net profit margin= net profit/ sales*100 Net profit margin in year1=260,000/1350, 000*100 =19.25 Net profit margin in year2= 300,000/1668, 000*100 =17.98
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(c) Return on capital employed= Net profit before interest and tax/capital employed*100 Return on capital employed in year 1=260,000/1248, 000*100 =20.83 Return on capital employed in year2=300,000/1428, 000*100 =21.00 (d) Earnings per share(EPS)=Net profit after tax/number of shares Earnings per share in year1=190,000/600,000=0.32p Earnings per share in year2= 200,000/600,000 =0.33p (ii) Efficiency ratio (a) Stock turnover period= Average stock/cost of sales* 365 Stock turnover period in year1= 22,000/420,000 *365 =19.11days Stock turnover period in year two= 48,000/544,000*365 =32.20days (b) Debtors collection period= Trade debtors/credit sales *365 Debtors collection period in year 1=190,000/1350, 000*365 =51.37days Debtors collection period in year 2=212,000/1668, 000*365 =46.9 days (c) Creditors payment period= trade creditors/credit purchases*365 Creditors payment period in year 1=56,000/432,000*365 =47.31 days Creditors payment period in year 2=78,000/570,000*365 =49.94 days (iii) Liquidity (a) Current ratio=current assets/current liabilities Current ratio in year 1=212,000/204,000 = 1.03 Current ratio in year 2=260,000/332,000
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=0.78 (b) Acid test ratio or quick ratio= current assets- stock/current liabilities

Quick ratio in year 1= 190,000/204,000 =0.93 Quick ratio in year 2= 212,000/332,000 = 0.63 (iv) Gearing Debt/equity ratio= Debt (long-term debt)/equity*100 Debt ratio in year 1=200,000/1048000*100 = 19.08 Debt ratio in year 2=180,000/1248000*100 = 14.42 Increase in stock= (stock in year 2- stock in year 1)/stock in year 1*100

(v)

Increase in stock= (48,000-22000)/22000*100 = 26000/22000*100 =118.18 (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- debtors in year 1)/debtors in year 1*100 = (212000-190000)/190000*100 = 11.57 (viii) Increase in overdraft =(overdraft in year 2- overdraft in year 2)/overdraft in year 1*100 = (154000-78000)/78000)*100 =97.43

References Books
1. Financial Accounting for Business- Bob Ryan 2. Financial Accounting for Business Managers- Asish K.Bhattacharyya 3. A Concepts Based Introduction to Financial Accounting- D K Kolitz A.B Quinn

Websites
1. http://www.mbaknol.com/financial-management/financial-management-definitionand-its-features/ 2. http://www.investopedia.com/terms/e/eps.asp 3. http://www.investopedia.com/terms/e/efficiencyratio.asp 4. http://www.advfn.com/Help/liquidity-ratio-112.html 5. http://www.investopedia.com/terms/g/gearing.asp 6. http://www.investopedia.com/terms/g/gearingratio.asp 7. http://www.investopedia.com/terms/i/investment.asp 8. http://www.bizmove.com/finance/m3b3.htm 9. http://www.accountingformanagement.com/gross_profit_ratio.htm 10. http://www.financescholar.com/return-capital-employed.html 11. http://www.investopedia.com/terms/o/overtrading.asp 12. http://www.clearlybusiness.co.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.businesslink.gov.uk/bdotg/action/detail?itemId=1073791134&type=RES OURCES 14. http://www.scribd.com/doc/15596371/Final-Project-Report-on-Financial-StatementAnalysis
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