Introduction to Financial Management and Control
The operations at a business unit can be conducted efficiently through appropriate financial planning. The management and control of financial resources available is necessary to support all the business activities. It is necessary for the management to evaluate the financial requirement of various departments and satisfying them through adequate funding options. Moreover, appropriate allocation of resources to various activities is necessary for achieving operational excellence (Stolowy and Lebas, 2006). The business unit is also responsible for evaluating its performance from time-to-time through its financial statements. The report presented herewith provides an in-depth overview of various financial aspects involved in the organization. It deals with evaluation of business performance through ratio analysis. It also throws light on the manner in which profitable investment decisions can be taken by the organization. Finally, concept of break-even analysis with its application in business scenario is provided. The report henceforth provides a detailed overview of proper administration and management of finance through adoption of financial techniques.
Part A: Smithson Plc
Business report for evaluation of performance
The performance of Smithson plc, a public limited company specialized in manufacturing and distribution of office furniture, can be evaluated through ratio analysis. It is the technique to judge financial stability, profitability and liquidity of an enterprise.
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Profitability ratios: The ratios are calculated to ascertain business efficiency to earn profits during the year. The gross profit ratio margin has decreased marginally and is estimated at 50.87% indicating sufficient margin of profits on revenue. However, there is significant decrease in operating and net profit margin indicating increase in operating and non-operating expenses. The net profit margin has decreased to the level of 6.53% indicating that business unit is able to save little amount of funds as a net profit (Ahrendsen and Katchova, 2012). The organization should try to deduct its expenses so as to have sufficient profits in hand at the year's end.
Liquidity ratios: In order to judge the business’s capacity to pay off its short and very short term obligations, liquidity ratios are calculated. As per the ideal ratio, current assets should be equal to current liabilities of the business unit. The current and quick ratio for Smithson plc has increased marginally on annual basis. The current and quick ratio is estimated at 0.44 and 0.41 respectively in year 2013. This indicates that business's liquidity position is in question and it may face an issue in paying off its short and very short term obligations due to outsiders. The organization henceforth should infuse more amounts of funds in liquid form. This will help in improving its liquidity and ensuring availability of sufficient funds for meeting working capital requirement.
Efficiency ratios: The ratios help in judging business's efficiency to make utilization of resources available. Asset utilization capacity of the business unit is judged by total assets turnover ratio. The ratio has reduced marginally and reached to a level of 0.88 times. This indicates that the organization is earning revenue that is 0.88 times of total assets. The organization although is managing large scale operation; it should strive to increase its revenue in comparison to sales (Vandyck, 2006). This in turn will support business activities to make optimum utilization of assets available. Inventory turnover ratio of approximately 17 times indicates that there is sufficient movement of stock within the business during the year.
Gearing/ Stability ratios: The ratios are calculated to judge long term stability position of an enterprise. As per the ideal ratio, equity should be at least double of debt employed within the business unit. The ratio of 0.48 indicates that the organization has employed sufficient equity to support debt obligations in long term. Times interest ratio has reduced significantly due to increase in debt within the business. The organization should direct its efforts to improve its profitability in comparison to interest expense to be paid. The business unit should ensure that sufficient profits are earned in comparison to interest expenses. This in turn will result in acquiring sound stability position for long term.
Working capital cycle
Working capital cycle refers to the duration for which the business unit needs to invest funds into the business (Shim and Siegel, 2008). In other words, it refers to the duration for which the organization needs to employ working capital. It is calculated with the help of following formula.
Working capital cycle indicates that availability of lack funds to manage day-to-day operations of business. The liquidity position of business is in question for both the years. However, it has improved marginally it does not resulted in availability of large amount of liquid cash as working capital.
Part B: Jones Ltd
Investment appraisal techniques
The business unit can expand its operations by planning its investments from time-to-time. It is essential for the organization to make investment in profitable investment options. In order to judge the viability of projects into consideration, investment appraisal techniques are adopted. Henceforth, the Jones Ltd. can also judge the viability of decision to purchase new machinery through adoption of these t