PGBM01 financial management & control assignment sample
Module Code and Title: PGBM01 financial management & control assignment sample
Part A
Calculation of various ratios of the Luxury heating Plc has been highlighting the financial condition of the company appropriately. The calculation of various ratios will help to highlight the financial condition of the luxury heating plc. It will give the shareholder of the company to understand various strengths and weaknesses of the company.
When investors understand the financial position of a company in an appropriate way then he makes his decision about the investment in the company. So the analysis of those ratios will be very beneficial for the investors. It will be helpful for the management of the company also. It will help them to make appropriate decisions about their strategy and their future.
Profitability Ratio
In the context of calculating the profitability ratio it is very crucial to mention that this ratio assesses the ability of an organization in earning profits from their sales or operation.
- i) GP Ratio: The gp ratio or the gp margin is the “key indicator for understanding the financial condition of an organization in an effective way.” The gp of an organization indicates the estimated net profit (Priono et al. 2019). Therefore it can be said that the GP ratio is one of the most important and effective ratios for any company. 50-70% of margin is considered a good margin.. The GP margin of the company for the year 2020 and for the year 2021 is below 50%. So it is clearly indicating that there are some shortcomings in the organization where they should focus. . On the other hand “margin of the company” has been decreasing. The GP margin of the company for the year 2020 was 49% approx which came to 45% approx in the year 2021. The decrease in the gp margin indicates that the company has been not making Profit from their sales effectively and the profitability of the organizations have been decreasing.
- ii) Net Profit Margin: The net profit margin is also very important indicator of the “financial condition” of a company The “np margin of an organization helps the investor to understand whether the company has been generating sufficient profit from their sales or not (Prihartono et al. 2018). It also helps an organization to understand whether the operating cost and overhead cost of the organization are contained or not”. A net profit margin of 5% is considered as low NP margin while the 20% margin of NP is considered as healthy and 10% as average. The understanding of the appropriate margin helps the shareholders and investors of the company to understand the company’s current financial situation and it helps them to choose the proper project or company where they can make their investment. The calculation of NP margin of the company showed that the NP margin of the company for the year 2020 was 16.224% which came to 6.787% in the year 2021. Therefore it can be said that the profitability of the organization has been decreasing. The decrease in the profitability of an organization can create various hindrances in their business operations. So the company needs to choose an appropriate strategy which will be very beneficial for the company.
Return on Asset
The return on assets is also a key financial indicator. It helps to understand the capability of the organizations in utilizing the available assets.The calculation of RoA is indicating the capability of the organization in utilizing their assets has decreased from 2020. That can be the probable reason for decreasing the GP margin and NP margin of the company also.
Return on Equity
The ROE is very beneficial for understanding the effectiveness of an organization in generating benefits for their shareholders besides their earnings. It helps the investors of the organization to compare the performance of various equity investments and it helps them to choose the appropriate strategy. In the context of the performance of Luxury Heating Plc, it can be said that the return on equity of the organization decreases massively from the previous year. Such decrease can make a great impact on the incoming investment of the organization.
Return on Capital Employed
ROCE indicates how efficiently an organization has been using their capital in their business operation. So it can be said that the ROCE is one of the most important for an investor to make an appropriate investment decision on the basis of return generation of the company. The calculation of the ROCE of the Heating PLC is also showing that the ROCE of the organization has been decreasing. The decrease in the ROCE of the organization can decrease the flow of investment of an organization.
Efficiency Ratio
The efficiency ratio measures the ability of the company in utilizing resources and assets. The Calculation of various ratios has been showing the efficiency of the company in utilizing all their resources. The calculation of inventory turnover ratio of the organization highlighting a decrease in the ratio (Paarima et al. 2021). When the inventory turnover ratio of an organization decreases it indicates the organization has holding their inventory longer than previous.
It indicates the ineffectiveness of the organization. Such decrease can impact the business operation of an organization a lot. The calculation of the AR turnover is also showing that the AR turnover of the company has been decreasing. The decrease in the AR turnover indicates the company has been struggling in their business operation.
The Asset turnover ratio of the company also decreased a lot in 2021 in comparison to 2020. The decrease in the Asset turnover ratio indicates that the company has not been utilizing their assets in an effective way.
Liquidity Ratio
The liquidity ratio is very helpful for understanding the availability of the cash in an organization. Therefore it can be said that the liquidity ratio determines the financial position(short term) of an organization in an effective way. The calculation of quick ratio shows that the quick ratio of the company for both the years is more than 1 (Kembauw et al. 2020).
A quick ratio more than 1 indicates that the company is able to pay all their debts in an effective way. The calculation of acid test ratio of the company is showing that the ratio of the company for the year 2020 was 0.89 and it increased to 1.04 in 2021.In the context of the acid test ratio it is very important to mention that the ratio above 1 indicates that the company has enough liquid asset for paying their current liabilities.
Gearing Ratio
The gearing ratio is also a key indicator of various financial risks associated with the organization (Chang et al. 2020). The calculation of gearing ratio is showing that the Debt to equity ratio of the company is less than 1 and a ratio less than 1 indicates that all the debts of the company are not bad debt and there is a high possibility of recovering those debts.
Investment Ratio
The calculation of Return on equity is showing that it has been decreasing and the decrease in the ROE means the efficiency of the company has been decreasing and they are not able to pay their debts in an appropriate way.
Recommendation
The management of the company needs to focus on this thing in an effective way and they should take appropriate steps which will be very beneficial and very effective for their growth. Appropriate focus on these things and taking appropriate strategy will be very beneficial and very effective for the organization.
Part B
Different Techniques for Assessing Long Term Business Investment Project
To choose the appropriate business investment project an organization can choose various techniques. Choosing the appropriate project or business for the investment is very much required. Choosing the appropriate project helps to increase the profitability of investors. Investors use different techniques for choosing the long term business or project.
- i) Capital Budgeting: Capital Budgeting is one of the most important and effective techniques for choosing a project or business in an effective way (Anoos et al. 2020). The process of Capital budgeting can involve almost everything including acquisition of land or purchasing any fixed asset. It is one of the most effective processes for choosing or selecting an appropriate project. Investors always measure the capital budgeting before investing into a project or investment (Bapat, 2020). It helps the investor to understand the risk and return from a project. The risk and return are very important things to understand before making any investment. It is quite obvious that investors generally like to invest their money in such a project or investment which will give them a good return and where the risk is very low. Therefore it can be said that capital budgeting is one of the most effective strategies or techniques for choosing a project.
- ii) Calculation of Ratios: Ratios are most effective for understanding the financial condition of an organization in an effective way. Investors always measure various ratios of the organization for investing. Calculation of various ratios is very beneficial for giving a clear idea of the financial condition of an organization. It indicates the capability of the organization in increasing their business operation and paying off their debts. Investors always analyze those things for getting a proper understanding about the financial condition of the organization. The calculation of various ratios also indicates various shortcoming of an organization also. So the evaluation of ratios in an effective way is very helpful for the investors to choose the appropriate project or business for the investment.
iii) Calculation of Payback Period: The payback period is also very important for the investors to understand whether they should invest in a particular project or not. The term “Payback Period” refers to the time required for recovering the cost of an investment (Alkaraan, 2018). Therefore it can be said that it is very important and effective for understanding the financial condition of the organization and helps investors to understand the appropriate project for the investment.
There are various other techniques also like NPV, IRR, Opportunity cost etc. which are very effective for understanding the most profitable project for an organization.
These techniques help the decision maker a lot in understanding the financial condition of an organization in an effective way. In the context of the investment, it is very important to mention that investors want to invest in the most profitable project or investment. That is why they use different techniques. Choosing the appropriate project helps to increase the effectiveness of investors as it helps to increase the profitability of the investors. Investors always measure the financial condition of an organization in an effective way (Akotia, 2019).
The measurement of the financial condition helps investors to understand the appropriate project for their investment. The calculation of ratios or capital budgeting of an organization gives a clear indication about the company’s financial condition. It highlights the capabilities of the company. After analyzing those calculations investors choose the appropriate project for their investment. Therefore it can be said that this potential value of information helps investors a lot in their decision making and understanding the appropriate project for investment.
Reference List
Journals
Anoos, J., Ferrater-Gimena, J.A.O., Etcuban, J.O., Dinauanao, A.M., Macugay, P.J.D. and Velita, L.V., 2020. Financial management of micro, small, and medium enterprises in Cebu, Philippines. International Journal of Small Business and Entrepreneurship Research, 8(1), pp.53-76.
Bapat, D., 2020. Antecedents to responsible financial management behavior among young adults: moderating role of financial risk tolerance. International Journal of Bank Marketing.
Chang, C.L., McAleer, M. and Wong, W.K., 2020. Risk and financial management of COVID-19 in business, economics and finance. Journal of Risk and Financial Management, 13(5), p.102.
Kembauw, E., Munawar, A., Purwanto, M.R., Budiasih, Y. and Utami, Y., 2020. Strategies of Financial Management Quality Control in Business. TEST Engineering & Management, 82, pp.16256-16266.
Paarima, Y., Kwashie, A.A. and Ofei, A.M.A., 2021. Financial management skills of nurse managers in the Eastern region of Ghana. International Journal of Africa Nursing Sciences, 14, p.100269.
Prihartono, M.R.D. and Asandimitra, N., 2018. Analysis factors influencing financial management behaviour. International Journal of Academic Research in Business and Social Sciences, 8(8), pp.308-326.
Priono, H., Yuhertiana, I., Sundari, S. and Puspitasari, D.S., 2019. Role of financial management in the improvement of local government performance. Humanities & Social Sciences Reviews, 7(1), pp.77-86.
Sujana, I.K., Suardikha, I.M.S. and Laksmi, P.S.P., 2020. Whistleblowing System, Competence, Morality, and Internal Control System Against Fraud Prevention on Village Financial Management in Denpasar. E-Jurnal Akuntansi, 30(11), pp.2780-2794.
Sujana, I.K., Suardikha, I.M.S. and Laksmi, P.S.P., 2020. Whistleblowing System, Competence, Morality, and Internal Control System Against Fraud Prevention on Village Financial Management in Denpasar. E-Jurnal Akuntansi, 30(11), pp.2780-2794.
Vovchenko, N.G., Andreeva, O.V., Orobinskiy, A.S. and Sichev, R.A., 2019. Risk control in modeling financial management systems of large corporations in the digital economy.
Appendices
Appendix 1: Calculation of Profitability Ratios
| Profitability Ratios | ||
| £000’s | £000’s | |
| Calculation of Gross Profit Margin | 2020 | 2021 |
| Revenue | 21,400 | 24,650 |
| Cost of goods sold | 10780 | 13550 |
| Gross Profit Margin | 49.62616822 | 45.03042596 |
| Formula of Gross Profit Margin | {(Revenue – Cost of Goods sold)/Revenue}*100 |
| £000’s | £000’s | |
| Calculation of Net Profit Margin | 2020 | 2021 |
| Net Profit after paying interest, tax and dividends | 3472 | 1673 |
| Sales | 21400 | 24650 |
| Net Profit margin | 16.22429907 | 6.787018256 |
| Formula of Net Profit Margin | (Net Profit/Sales)*100 |
| £000’s | £000’s | |
| Calculation of Return on Asset | 2020 | 2021 |
| Net Income | 3472 | 637 |
| Total Asset | 22,245 | 28,005 |
| Total Average Asset | 11122.5 | 39127.5 |
| Return on Asset | 0.312160036 | 0.01628011 |
| Formula of Return on Asset | (Net income/Total Average Asset)*100 |
| £000’s | £000’s | |
| Calculation of Return on Equity | 2020 | 2021 |
| Net Income | 3472 | 637 |
| Shareholders’ Equity | 15640 | 14768 |
| Average Shareholders’ Equity | 7820 | 22588 |
| Return on Equity (ROE) | 0.44398977 | 0.028200815 |
| Formula of Return on Equity | Net Income/Average Shareholders Equity |
| £000’s | £000’s | |
| Calculation of Return on capital Employed | 2020 | 2021 |
| Total Asset | 22245 | 28005 |
| Current Liabilities | 4215 | 5120 |
| Capital Employed | 18030 | 22885 |
| Earning Before Interest and Taxes | 6480 | 4540 |
| ROCE | 35.94009983 | 19.83832205 |
| Formula of Return on capital Employed | EBIT/Capital Employed |
| Capital Employed | Total Asset – Current Liabilities |
(Source: MS Excel)
Appendix 2: Calculations of Efficiency Ratios
| Efficiency Ratios | ||
| £000’s | £000’s | |
| Calculation of Inventory Turnover Ratio | 2020 | 2021 |
| Cost of Goods sold | 10780 | 13550 |
| Inventory | 3400 | 3950 |
| Average Inventory | 1700 | 5375 |
| Inventory Turnover Ratio | 6.341176471 | 2.521 |
| Formula of Inventory Turnover Ratio | COGS/Average Inventory |
| £000’s | £000’s | |
| Calculation of Accounts Receivable Turnover Ratio | 2020 | 2021 |
| Sales | 21400 | 24650 |
| Accounts Receivable | 3270 | 5350 |
| Average Accounts receivables | 1635 | 6985 |
| Accounts Receivable Turnover Ratio | 13.08868502 | 3.529 |
| Formula of Accounts Receivable Turnover Ratio | Net Sales / Average accounts Receivable |
| £000’s | £000’s | |
| Calculation of Asset Turnover Ratio | 2020 | 2021 |
| Net Sales | 21400 | 24650 |
| Total Asset | 22245 | 28005 |
| Average Total Asset | 11122.5 | 39128 |
| Asset Turnover Ratio | 1.924027871 | 0.63 |
| Formula of Asset Turnover Ratio | Net Sales/Average Total Asset |
(Source: MS Excel)
Appendix 3: Calculations of Liquidity Ratios
| Liquidity Ratios | ||
| £000’s | £000’s | |
| Calculation of Current Ratio | 2020 | 2021 |
| Current Asset | 7165 | 9300 |
| Current Liabilities | 4215 | 5120 |
| Current Ratio | 1.699881376 | 1.81640625 |
| Formula of Current Ratio | Current Asset/ Current Liabilities |
| £000’s | £000’s | |
| Calculation of Acid Test Ratio | 2020 | 2021 |
| Current Asset | 7165 | 9300 |
| Inventories | 3400 | 3950 |
| Current Liabilities | 4215 | 5120 |
| Acid Test Ratio | 0.893238434 | 1.04492188 |
| Formula of Acid Test Ratio | (Current Asset – Inventories)/Current Liabilities |
(Source: MS Excel)
Appendix 4: Calculation of Gearing Ratio
| Gearing Ratio | ||
| £000’s | £000’s | |
| Calculation of Debt to Equity Ratio | 2020 | 2021 |
| Long term Debts | 1150 | 6240 |
| Cash and Cash Equivalent | 495 | 0 |
| Total Debt | 655 | 6240 |
| Total Equity | 16880 | 16645 |
| Debt to Equity Ratio | 0.038803318 | 0.374887354 |
| Formula of Debt to Equity Ratio | Total Debt/Total Equity |
| £000’s | £000’s | |
| Calculation of Debt Ratio | 2020 | 2021 |
| Total Debt | 655 | 6240 |
| Total Asset | 22245 | 28005 |
| Debt Ratio | 0.029444819 | 0.222817354 |
| Formula of Debt Ratio | Total Debt/ Total Asset |
| £000’s | £000’s | |
| Calculation of Equity Ratio | 2020 | 2021 |
| Equity | 16880 | 16645 |
| Asset | 22245 | 28005 |
| Equity Ratio | 0.758822207 | 0.59435815 |
| Formula of Equity Ratio | Equity / Asset |
(Source: MS Excel)
Appendix 5: Calculation of Investment Ratio
| Investment Ratio | £000’s | £000’s |
| Calculation of Return on Equity Ratio | 2020 | 2021 |
| Net Earning | 3472 | 637 |
| Shareholders’ Equity | 15640 | 14768 |
| ROE | 22.19948849 | 4.313 |
| Formula of Return on Equity (ROE) | (Net Earnings/Shareholders’ Equity)*100 |
(Source: MS Excel)
Reference List
Journals
Akotia, Y.A., 2019. Financial Management of Churches in Ghana: A Case Study of Legon Interdenominational Church.
Alkaraan, F., 2018. Public financial management reform: an ongoing journey towards good governance. Journal of Financial Reporting and Accounting.
Anoos, J., Ferrater-Gimena, J.A.O., Etcuban, J.O., Dinauanao, A.M., Macugay, P.J.D. and Velita, L.V., 2020. Financial management of micro, small, and medium enterprises in Cebu, Philippines. International Journal of Small Business and Entrepreneurship Research, 8(1), pp.53-76.
Bapat, D., 2020. Antecedents to responsible financial management behavior among young adults: moderating role of financial risk tolerance. International Journal of Bank Marketing.
Chang, C.L., McAleer, M. and Wong, W.K., 2020. Risk and financial management of COVID-19 in business, economics and finance. Journal of Risk and Financial Management, 13(5), p.102.
Kembauw, E., Munawar, A., Purwanto, M.R., Budiasih, Y. and Utami, Y., 2020. Strategies of Financial Management Quality Control in Business. TEST Engineering & Management, 82, pp.16256-16266.
Paarima, Y., Kwashie, A.A. and Ofei, A.M.A., 2021. Financial management skills of nurse managers in the Eastern region of Ghana. International Journal of Africa Nursing Sciences, 14, p.100269.
Prihartono, M.R.D. and Asandimitra, N., 2018. Analysis factors influencing financial management behaviour. International Journal of Academic Research in Business and Social Sciences, 8(8), pp.308-326.
Priono, H., Yuhertiana, I., Sundari, S. and Puspitasari, D.S., 2019. Role of financial management in the improvement of local government performance. Humanities & Social Sciences Reviews, 7(1), pp.77-86.
Sujana, I.K., Suardikha, I.M.S. and Laksmi, P.S.P., 2020. Whistleblowing System, Competence, Morality, and Internal Control System Against Fraud Prevention on Village Financial Management in Denpasar. E-Jurnal Akuntansi, 30(11), pp.2780-2794.
Sujana, I.K., Suardikha, I.M.S. and Laksmi, P.S.P., 2020. Whistleblowing System, Competence, Morality, and Internal Control System Against Fraud Prevention on Village Financial Management in Denpasar. E-Jurnal Akuntansi, 30(11), pp.2780-2794.
Vovchenko, N.G., Andreeva, O.V., Orobinskiy, A.S. and Sichev, R.A., 2019. Risk control in modeling financial management systems of large corporations in the digital economy.
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