Applied Business Finance Report

The objective of this report is to review the extent to which Sophia Enterprise has complied with good financial management practices and the consequent implications for the firm. The financial management is a function that helps the business make decision with respect to the use of financial resources needed to support the business in the future. They assist the management in achieving objectives such as increasing company’s profitability, optimizing expenses, and preserving cash. Specifically, concerning the outline of the report, the focus will be made on such areas as the financial management theory, the analysis of the financial statements, ratio analysis, and the issuance of the comparison of the respective liquidity. Such analyses will enable the company to understand its financial status as well as change for the better.

Section 1: Financial Management Theory & Financial Statements

1.1 Financial Management Theory

Definition of Financial Management

Financial management therefore can defined as a process that involves planning, directing, coordinating and controlling of the financial transaction in business include procuring and using of finance (Finkler, Calabrese, and Smith, 2022). It aims on making profits, attaining a crucial level of solvency, and the overall long term financial control.

Importance of Financial Management in Decision-Making

Financial management is always used as an important factor that aids in the decision making process by offering quantitative data. Proper financial management allows businesses to:

Allocate resources effectively: Helps to control and ensure that funds are rightly expended on areas such as production, marketing or operations.
Ensure business sustainability: Assists in managing working capital to meet short-term monetary obligations and achieving sustainable long-term financial expansion.
Support profit maximization: Helps in appraising investment-related decisions with a view of achieving the greatest returns for the least risks.

Examples of Financial Management in Practice

Profit maximization: Financial managers may analyses market conditions and reduce less important expenses in order to increase margins.
Cost control: In tracking expenses such as raw material costs or labour costs, companies can uphold satisfactory profit margins.
Investment: Financial management also includes the process of balancing profitability in choosing investment opportunities like expanding operations or establishing investment in technology through probable profits.

1.2 Major Financial Statements

Income Statement

The income statement or the profit and loss statement displays the revenues and costs of a business throughout a specific period (Eun, Resnick, and Chuluun, 2021). Its purpose is to measure the company’s financial performance by calculating:

Gross profit: Sales revenue less the cost of the goods that was sold.
Net profit: Gross profit less all operating and other expenses. The income statement enables the users it provides to assess the entity’s profitability as well as the efficiency of its operations.

Balance Sheet

The balance sheet offers an insight of a company’s financial situation at a given time of the financial year. It consists of:

Assets: Assets controlled by the business organization (for instance, cash, equipment).
Liabilities: Liabilities that the company has towards others (for example, loans, credits).
Equity: The owner’s statement that remains after all the liabilities are cleared. This statement provides an overall evaluation of the financial health of the company together with its liquidity.

Cash Flow Statement

A cash flow statement shows how cash was generated and utilised over a period of time. It is divided into:

Operating activities: The cash derived from operations directly related to the primary business of the company.
Investing activities: Capital expenditure that is cash invested or utilized in investments.
Financing activities: Cash relation with borrowing or repaying of loans. This statement is important in liquidity analysis and can be of great help to business organizations in managing their cash resource.

Importance of Financial Statements

These financial statements are helpful for measuring the performance of the business, checking the financial status and making the important decisions such as expansions, layoffs, or investments (Kimmel, Weygandt, and Kieso, 2020). It tell a lot about profitability, liquidity and efficiency and can be used to make future projections.

Section 2: Analysis of Sophia Enterprise's Financial Data

2.a Income Statement Analysis

Revenue: Sophia Enterprise earned £80,000 from its business operations for the year. These funds can be arrived by evaluating the total sales from its operations.
Gross Profit: Subtracting the cost of sales of £30,000, the company made its gross profit of £50,000 which proves efficiency of the business in controlling direct expenditure (Warren, Jones and Tayler, 2020).
Profit from Operations: Administration expenses were small as showed by £2,750 there by resulting in an Operating Profit of £47,250. This shows that there was a good operation efficiency in the financial year.
Finance Costs and Taxes: Other costs such as, finance cost and taxes brought the profit down, however, the company made £47,750 of profit before tax and a net profit of £37,400 for the year.

2.b Balance Sheet Analysis

Assets: The total asset figure stands at £1,166,990 which is a good measure of the company’s strength in terms of assets which include; cash and cash equivalents £469,590, Tangible Assets £537,900.
Liabilities: Fixed and current liabilities amount to £254,925 with a bank loan being the largest component of it (£170665).
Equity: The total equity of the company is £912,065 which proves that the majority of the company’s assets are funded by shareholders instead of loans.

Section 2(c): Ratio Analysis

Operating Profit Margin:

Jack has better operating profit margin of 8.00%, While Jill had 6.00%. This shows that the organization, through Jack, is much more capable of handling its operating costs as compared to its operating income (Schroeder, Clark, and Cathey, 2022). Jill has been able to produce a relatively smaller proportion of its profit from its core business operations implying better cost control and operating efficiency than the Jack.

Return on Capital Employed (ROCE):

Return on Capital Employed calculates the amount of return generated from investing in fixed assets. Jill however posts better result than Jack in case of ROCE since Jill has been able to earn 30.00% and Jack 25.00%. This means that Jill has higher efficiency when it comes to utilizing the capital in order to produce profits. It shows that Jill’s investments and resources are being put into better use to offer better returns though with smaller profit margins.

Current Ratio:

According to the balance sheets, the current ratio of Jack’s is 3.66, which is almost double of Jill’s ratio of 1.45. For instance, a higher current ratio implies that Jack possesses more current assets to manage the current liabilities implying good coverage of short-term debts (Allen, Kraakman, and Khanna, 2021). This explains why Jill’s ratio is lower that of Max; actually, its liquidity might be overall tighter, meaning it has comparatively fewer liquid assets at its disposal to pay outstanding financial obligations.

Quick Ratio:

Jack has a much higher quick ratio of 2.18 as compared to Jill of 0.82 and this shows that Jack has the ability to cover all the short-term liability without resorting to inventory. This goes a long way in emphasizing Jack’s better management of the liquidity aspect.

Accounts Payable Days:

Accounts payable period in the case of Jill is 45.63 days, while Jack’s was 30.82 days. This implies that Jill pays its suppliers after a longer period which may be as a result of better credit terms or otherwise, cash flow problems.

Section 2(d): Horizontal Analysis

Horizontal analysis is comparative analysis of data at two different times which brings out the changes and the trends. The percentage change between 2022 and 2023 can be determined and this will be useful to the business in terms of areas that needs to be focused on or areas of concern.

Net Income

As in the case with the Sophia Enterprise, it was noted that in 2023 the net income went up by 20. 28%, from £469,317 in 2022 to £564,494. These larger increases point to improved overall margins, a sign of enhanced financial performance for 2023.

Gross Profit

In the same context, the gross profit on the other hand show a negative value as was the case in the previous year with a net loss position of £13,875,212 as fiscal year 2023, also the gross profit was £13,119,295 as the fiscal year 2022, which indicates that the company faced loss making in both years. While the gross profit increase by 5.76%, the company still experienced some inefficiencies which are expressed in difficulty to control direct costs and have positive gross profit.

Interest Expense

Interest expenses on the other hand reduced by 20.16% from £ 65,388 in the 2022/23 financial year to £ 52,208 in the 2023/24 financial year (Birt, et. al., 2020). This reduction indicates that the borrowing costs of Sophia Enterprise was reduced and this widely enhance net profitability.

Cost of Sales

The cost of sales was the next line item that recorded a slight rise and this was by 6.26% increase- Total £13,588,612 in 2022 and £14,439,706 in 2023. This shows higher cost of production or purchasing which will be very challenging to meet the company’s profit targets given certain constraints.

Total Revenue

When it comes to the total revenue, the growth has been noted reaching 27.48 % increase from £15,152,092 in 2022 to £19,315,165 in 2023. From this growth one can infer that during the year Sophia Enterprise was able to expand its operations or sales thus earning more.

Selling, General, & Administrative Expenses

Selling general and administrative expenses were up by 12.5%, from £8,591 in 2022 to £9,626 in 2023. This rise indicates higher operations costs which if not managed will definitely cut down on net income in the future.

Section 3: Liquidity Comparison & Improvement Suggestions

3.1 Definition of Liquidity

Liquidity is defined as the extent to which a firm’s assets can be converted to cash to meet its current liabilities. To conclude for business finance, liquidity helps the company to meet cost like salaries, cost of goods sold, and other expenses that are incurred while operating a business. Operating with little cash leads to insolvency even when the company makes profits on paper. Liquidity is actually very important in business because it enables an organization to continue with daily operations without being hampered by inadequate cash flow.

3.2 Liquidity Comparison

Analyze and compare liquidity status of Jack and Jill it is appropriate to use the current ratio as well as the quick ratio. Hereby you can see that Jack has a current ratio of 3. 66 and a quick ration of 2. 18 meaning that the company has plenty of liquidity to meet its short term obligations in case they arise (CFI team, 2022). This is also supported by the fact that the current ratio of the company is well above 1. 0 is generally considered as an indicator that a firm is in a position to honor its commitments. Thus, high quick ratio, which excludes inventory, also points to even stronger liquidity of Jack.

In the same period, however, the current ratio results were evidenced with Jill holding a better ratio of 1. 45 and a quick ratio of 0. 82. Though, comparing the current ratio, Jill is good at this position to meet its current obligations, while quick ratio suggests that company might face difficulties if it does not sell the inventory in the short run. In the short run, it means that Jack can be in a less risky liquidity position than Jill so that he/she can provide better short-term money security.

3.3 Suggestions for Enhancing Liquidity

To enhance its liquidity, Sophia Enterprise can take several practical steps:

1. Improve Cash Flow Management: Measures of greater control over cash flow, including invoicing customers, extending prompt payment discounts to customers can increase choosing speed.

2. Reduce Debt: High interest debt can be eliminated from Sophia Enterprise, hence reducing financial obligations that hinder adequate cash balance for operations.

3. Optimize Inventory: Inventory reduction, specifically in cases where stock is too high or slow moving essentially frees up cash locked into the inventory. Basically, through the measures proposed above, the company can be able to balance its stock levels through effective management of its inventory and thus achieving a more liquid position.

Conclusion
This report has proved the importance of financial management to Sophia Enterprise by evaluating the company’s financial statement results, ratio performance and liquidity. One of the critical aspects of any business is the management of its financial resources with the help of which it can allocate funds, become profitable, maintain its liquidity, and be stable. Performance analysis of a financial statement and ratios is the significant tool to identify the organizational efficiency and sound financial status. These finding will help the board of Sophia Enterprise to make the right decisions in matters such as cost control, liquidity, and profitability hence helping in the long-term sustainability of the company.

References

Allen, W.T., Kraakman, R. and Khanna, V.S., 2021. Commentaries and cases on the law of business organization. Aspen Publishing. https://www.academia.edu/download/4660343/busorg.pdf

Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J. and Bond, D., 2020. Accounting: Business reporting for decision making. John Wiley & Sons. https://research.usq.edu.au/download/28a1cbe041802e3b8ce0d9979ae7c638dd6aac6b80852e700133925ca6774634/2253579/Birt_Chalmers_Beal_Brooks_Byrne_Oliver_2008_PV.pdf

CFI team 2022. Ratio Analysis. [online] Corporate Finance Institute. Available at: https://corporatefinanceinstitute.com/resources/accounting/ratio-analysis/.

Eun, C.S., Resnick, B.G. and Chuluun, T., 2021. International financial management. McGraw-Hill. https://thuvienso.hoasen.edu.vn/bitstream/handle/123456789/12533/Contents.pdf

Finkler, S.A., Calabrese, T.D. and Smith, D.L., 2022. Financial management for public, health, and not-for-profit organizations. CQ Press. https://koreascience.kr/article/JAKO202104142224615.pdf

Kimmel, P.D., Weygandt, J.J. and Kieso, D.E., 2020. Financial accounting: Tools for business decision making. John Wiley & Sons. https://web-app.usc.edu/soc/syllabus/20093/14765.pdf

Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2022. Financial accounting theory and analysis: text and cases. John Wiley & Sons. https://www.researchgate.net/profile/Mousa-Saleh-2/post/I_need_information_or_references_regarding_International_Accounting_Standards_and_Financial_Reporting_Standards_IAS_IFRS_Thanks_Can_anyone_help/attachment/5c73cabd3843b0544e680a45/AS%3A730148655599617%401551092413456/download/Financial+Accounting+Theory+and+Analysis+-+Text+and+Cases+%281%29.pdf

Warren, C.S., Jones, J.P. and Tayler, W.B., 2020. Financial and managerial accounting. Cengage Learning, Inc.. https://thuvienso.hoasen.edu.vn/bitstream/handle/123456789/13155/Contents.pdf?sequence=5&isAllowed=y

BMP3005 Applied Business Finance

Table of Contents

Introduction (Aim of Report)