FINANCIAL MANAGEMENT WORKBOOK

BUSI48951
MANAGEMENT IN ORGANISATIONS
Academic Year 2023-24
Module Leader: Lucia Egbe (lucia.egbe@ntu.ac.uk)
Module Team: Qazi Amin (qazi.amin@ntu.ac.uk)
Ovinda Wijeyaratne (ovinda.wijeyaratne@ntu.ac.uk)
Bernard Dom (bernard.dom@ntu.ac.uk)
Tasmia Hossain (tasmia.hossain@ntu.ac.uk)
Table of Contents
Welcome…………………………………………………………………………………………………3
DAY 1 Interpretation of Financial Statements…………………………….……….4
Ratio Formula Sheet……………………………………………………….………………………9
DAY 2 Investment Appraisal…………………………………………………………………10
Present Value Table………………………………………………………………………….….15
DAY 3 Budgeting and CVP Analysis……………………………………………………….16
Assessment Brief………….………………….………………………….………………………20

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Welcome to Financial Management.

Welcome to Financial Management. In the context of this module, the term

“Financial Management” refers to the accounting and finance theories and
tools which are necessary for managers to support their decision-making
process.

The 3 key areas we will cover are split across 3 weeks:

1. Financial accounting and Ratio Analysis;
2. Investment Appraisal;
3. Management Accounting and Budgets.

Financial statements serve as the financial heartbeat of any organization. They

are a comprehensive record of a company's financial performance and
position, providing valuable insights into its health, profitability, and solvency.

Understanding financial statements and the practice of ratio analysis is not only
fundamental for finance professionals but is also crucial for investors, creditors,
and decision-makers within a business. These tools are the foundation upon
which informed financial decisions are made, and they offer a window into a
company's past, present, and future.

In this exploration of financial statements and ratio analysis, we will embark on

a journey through the essential components of financial reporting. We will
uncover the significance of balance sheets, income statements, and cash flow
statements – the three core financial statements that encapsulate a company's
financial story. These statements provide a snapshot of a company's financial
health at a specific point in time and over a specific period, offering a basis for
evaluating its performance and making strategic decisions.

Moreover, we will delve into the world of financial ratios, which are key tools in
dissecting and interpreting the data presented in financial statements. Ratios
allow stakeholders to assess various aspects of a company's operations,
including its liquidity, profitability, efficiency, and solvency. By examining these
ratios, one can gain a deeper understanding of a company's financial strengths
and weaknesses, which in turn aids in risk assessment and investment decision-
making.
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This introduction will serve as a steppingstone into the realm of financial
analysis, providing a foundational understanding of the language of business
finance. We will discuss the importance of financial transparency, the principles
behind financial statement preparation, and the techniques used to extract
meaningful insights from these documents.

Whether you are an aspiring financial analyst, a business owner, or simply

curious about how financial data can drive better decision-making, this
exploration of financial statements and ratio analysis will equip you with the
knowledge and skills needed to navigate the intricate world of corporate
finance with confidence and competence.

Do attempt the Pre-work for each week before each session.

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DAY 1 Interpretation of Financial Statements and Ratio Analysis
Investinus plc

Statement of Financial Position (Balance Sheet)

Investinus plc
Statement of Financial Position 31st December 20x2
20x2 20x1
Non-current assets £'000 £'000
Property, Plant and Equipment 4,964 3,798
Current assets
Inventories 670 340
Trade receivables 690 355
Cash and cash equivalents 0 150
1,360 845

Total assets 6,324 4,643

Equity
Share capital (£1 shares) 550 475
Revaluation reserve 100 100
Retained profits 3581 3199
Total Equity 4,231 3,774

Non-current liabilities
10% Bank loan 1,200 300
Current liabilities
Trade payables 595 425
Taxation payable 142 129
Interest payable 20 15
Overdraft 136 0
893 569

Total liabilities 2,093 869

Total equity and liabilities 6,324 4,643

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Income Statement
20x2 20x1
£'000 £'000
Revenue 5,050 3,960
Cost of sales (3,250) (2,400)
Gross profit 1,800 1,560
Distribution expenses (725) (625)
Administration expenses (290) (225)
Operating profit 785 710
Finance costs (40) (30)
Profit before taxation 745 680
Taxation (142) (129)
Profit after taxation 603 551

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Activity –Ratio calculation and interpretation

Profitability Margin ratios

Using the income statement and SOFP (Balance sheet) of Investinus plc

Calculate and comment on:

3 Margin Ratios – Gross, Operating and Net.

Investinus plc
20x2 20x1 Change
Gross Margin 39.4%
Operating Margin 17.9%
Net Margin 13.9%

Is each year on year ‘change’ a good or bad thing?

What could be a potential cause of each movement?

Profitability Return ratios:

Using the income statement and SOFP (Balance sheet) of Investinus plc
Calculate and comment on the Return Ratio –ROCE.

20x2 20x1 Change

ROCE 17.4%

Is each year on year ‘change’ a good or bad thing?

What could be a potential cause of each movement?

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Liquidity ratios:

Using the income statement and SOFP (Balance sheet) of Investinus

Calculate and comment on: Liquidity ratios

Investinus plc
20x2 20x1 Change

Current Ratio 1.49:1

Acid Test 0.88:1

Is each year on year ‘change’ a good or bad thing?

What could be a potential cause of each movement?

Solvency ratios:
Using the income statement and SOFP (Balance sheet) of Investinus

Calculate and comment on: Solvency ratios

20x2 20x1 Change

Gearing 7.4%
Interest cover 23.7 times

Is each year on year ‘change’ a good or bad thing?

What could be a potential cause of each movement?

Efficiency ratios – Efficiency ratios & Operating cash cycle

Using the income statement and SOFP (earlier in this booklet) of Investinus

Calculate and comment on the following efficiency measures:

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 Investinus plc
20x2 20x1 Change

Asset Turnover 0.85 times

Inventory days 51.7 days
Receivable days 32.7 days
Payable days 64.6 days
Operating cash cycle 19.8 days

Is each year on year ‘change’ a good or bad thing?

What could be a potential cause of each movement?

RATIO FORMULA SHEET

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 Expre s s e d
Ratio as Formula
Profitability
Revenue Growth % Revenue Yr2 / Revenue Yr 1 as a % change
Gross Profit x100
Gross Profit Margin
% Revenue (Sales)

Operating Profit Margin % Profit before Interest and tax x 100

Revenue (Sales)

Net Profit Margin % Profit After Tax (sometimes called Profit attributable to Equity shareholders) x 100
Revenue (Sales)

Return On Capital Employed % Profit before Interest and tax x 100

Equity + Long Term Debt

Return on Assets - ROA % Profit After Tax (sometimes called Profit attributable to Equity shareholders) x 100
Total Assets

Return On Equity % Profit After Tax (sometimes called Profit attributable to Equity shareholders) x 100
Equity

Liquidity/Solvency
Ratio Current Assets (Cash, Inventory and Receivables)
Current Ratio
Current Liabilities (short-term debt and other payables)

Ratio Current Assets - Inventory

Quick Ratio (Acid Test)
Current Liabilities
Ratio Long-term (non-current debt)
Capital Gearing ratio Equity + Long-term (non-current debt)

% Long Term Debt x 100

Capital Gearing
Equity + Long Term Debt

Interest Cover times Profit efore Interest (Operating Profit)

Interest payable

Efficiency - and insight into working capital & liquidity

Revenue (Sales)
Net Asset Turnover
times Total assets - Current Liabilities
days Inventories x 365
Days Inventory Outstanding
Cost of Sales
Trade Receivables days - the
days
trade collection period Trade Receivables x 365
Revenue from Credit sales*
Trade Payable days - the
trade payable period days Trade Payables x 365
Cost of sales**

Cash conversion cycle days Days Inventory + Days Receivables - Days Payables
(Operating cash cycle)
Note - strictly these efficiency ratios would use Average inventory, receivables and payables.
In practice, unless given averages use the amount shown in the SOFP as the CLOSING balance
*Credit sales may not be given in which case use Sales per the SOCI.
** Strictly this should be Purchases but often not available
Investment Ratios
pence Profit After Tax and Preference dividends
Earnings Per Share EPS
Weighted average Number Of Shares in issue

times Market Share Price

Price/Earnings Ratio (P/E)
Earnings Per Share

times Profit after tax and preference dividends

Dividend Cover
Ordinary dividends paid
% Dividends Per Share
Dividend Yield
Market Share Price

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DAY 2 Investment Appraisal
Task: Beauts Ltd - Part 1

Beauts Ltd is a company which manufactures cosmetics which it sells on to the main high street
retailers. Its plastic packaging has attracted negative publicity recently due to the environmental
issues associated with it. To help its sustainability credentials, the company is currently
considering expanding its operation and producing a new product, a lipstick in a bio-degradable
container called “Eco-Tint”.

The owners of the business want you to evaluate the “Eco-Tint” against an alternative project, the
production of a blusher in a bio-degradable container. This alternative product is called “Eco-
Blush”. The two projects are mutually exclusive and only one of them will be undertaken by the
business.

Eco Tint

To produce the “Eco Tint” the company needs to invest in some new machinery. The new
machinery is expected to cost £1,000,000. Full payment for the machinery needs to be made on
delivery/installation. At the end of the 5-year period the machinery will be sold back to the
supplier for £50,000.

Year Estimated cash flow

1 300,000
2 320,000
3 350,000
4 320,000
5 250,000

Eco Blush

To produce the “Eco Blush” the company needs to invest in some new, different, machinery. The
new machinery is expected to cost £800,000. Full payment for the machinery needs to be made
on delivery/installation. At the end of the 5-year period the machinery will be sold back to the
supplier for £20,000.

Year Estimated cash flow

1 200,000
2 200,000
3 220,000
4 300,000
5 400,000

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Required:
1. Calculate the Payback Period for both investment projects

2. What would be your recommendation to the business about the investment?

Payback Period
Eco Tint
Cumulative cash
Investment Cash Flows
flows
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5

Payback period for Eco Tint ………

Eco Blush
Cumulative cash
Investment Cash Flows
flows
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5

Payback period for Eco Blush……..

Part 2: Beauts Ltd (NPV)

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Having heard about the concept of time value of money, the owners feel uneasy about the
outcomes of the investment appraisal method applied previously and so the owners of the
business want you to re-evaluate the “Eco Tint” against the alternative project “Eco Blush”.

Required:
3. Calculate the Net Present Value (NPV) for both projects. A template is provided below to
help you.

4. What would be your recommendation to the business about the investment based on the
outcomes of NPV?

5. What you observe in comparison to the outcomes of the previous evaluation using
payback period?

6. Outline the key advantages and disadvantages of the methods used (PP, NPV).

NPV template:

20% NPV
Eco Tint Eco Blush
Annua Annua
Investmen Present Investmen Presen
Year l cash 20% Year l cash 20%
t Value t t Value
flows flows
0 0
1 1
2 2
3 3
4 4
5 5

NPV - NPV -

Present value tables are on the final page for your reference when calculating the NPV.

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ARR and Payback Example: Elizabeth’s Project

Elizabeth was made redundant recently and was given a severance payment of £55,000 which
she uses to buy a special purpose delivery vehicle. She employs a driver. Each year she
receives money from customers for delivering goods; each year she pays all her expenses in
cash, and she pockets what is left: this amounts to £15,500 a year, which she reckons is a pretty
good return on her initial capital of £55,000.
After five years the vehicle is worn out, and she manages to sell it for £5,000.

Required:
 How much cash does Elizabeth make per year?
 How much profit does Elizabeth make per year?
 Can you calculate the ARR and payback for her project?

 If Elizabeth needs an ARR return of 20% and a payback within 3 years, would she
undertake this investment?

Payback Period
annual total
Purchase net cash cash Cumulative
vehicle Sell vehicle income flow Cash flow years?
£ £ £ £ £
Year 1
Year 2
Year 3
Year 4
Year 5

Total cash flow

Payback Period =

Accounting Rate of Return -

Elizabeth’s project

Annual cash depreciatio total

flows n profit
£ £ £
Year 1
Year 2
Year 3
Year 4
Year 5

Total profit
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ARR = average profit / average annual investment

Average profit =

Average investment =

ARR =

15
Present Value Table

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DAY 3 Budgeting and CVP Analysis
Morning Seminar

Task 1: Video.
Why is Zero Based Budgeting used? Find the main reason quoted by the video.

Task 2: Kraft Case study – look at the PDF in the learning room.
1. Does Kraft think budgets are important?
2. What kind of budget methodologies does Kraft use?
3. Why does Kraft think ZBB is appropriate for their business?
4. What are some of the disadvantages of budgeting which are identified in the article?
5. Why is it important to feedback insights from the budget variance analysis?

Task 3: Budgeting investigation and presentation

In table groups, investigate and present on the following questions:

Question 1:
Define the terms Fixed and Variable cost.
Explain how an understanding of the distinction between fixed and variable costs can be useful to
managers.

Question 2:
Most businesses seem to have a budget setting period towards the end of each year where the
following year’s budget are prepared (Periodic budgeting). Other businesses, however, have a
‘Continual budgeting’ approach, where each month a new month’s budget is prepared to replace
the month that has just passed, thereby ensuring that, at all times, a budget for a full planning
period is available.
What are the advantages and disadvantages of these approaches?

Question 3:
At what level can/how can you investigate variances? Remember they should not be considered
in isolation.

Question 4:
What is meant by Break-even point (BEP) for an activity?
How is the BEP calculated?
Why is it useful to know the BEP?
What are the limitations of Break-even analysis?

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Afternoon seminar:

TASK 1: Kahoot quiz on fixed vs variable costs

TASK 2
A company produces garden chairs. The chairs are sold for £50 each and have variable costs of
£30 each. The fixed costs of the company are £500,000. How many chairs do they need to sell to
break even, and to make a target profit (TP) of £100,000?

Units for TP = Fixed costs + TP

Contribution/unit
Contribution per unit = selling price – variable costs per unit

Find the sales required in units (1) to break even, and (2) to hit the target profit.

TASK 3
What is the total cost for an output level of 220 units?
Output (Units) Total costs (£)
50 1,250
150 1,750
200 2,000

Use the solution lay out below:

SOLUTION- TASK 3:
UNIT TOTAL COST (£)
HIGH
LOW
Difference

Variable cost per unit= £

Therefore, fixed cost= TC-VC
=
=

At 220 units, Total cost = £

=

TASK 4
The following information is available for the Plastics Ltd who make plastic boxes.
They have got a new competitor recently and there is a shortage of raw material plastics.
Some of their experienced staff left to join the competition. They have been taking on new, less
experienced staff to compensate and are keeping the factory open later.

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The marketing department has been given a target to increase sales. Admin staff have been
absent with Covid symptoms.
The manufacturing manager has left and been replaced by a new trainee manager on a lower
salary.

The following information is available for the Plastics Ltd in the month of July:
Budget Actual Variance
UNITS £’000 £’000
SALES REVENUE 60,000 58,650
VARIABLE labour 10,000 9,000
Variable materials 5,000 6,320
FIXED MANUFACTURING 18,000 17,000
COSTS
MARKETING AND ADMIN. 10,000 10,500
EXPENSE
ELECTRICITY 12,000 13,000

REQUIRED: Calculate the variances, showing favorable and adverse variances. Explain the
possible reasons for the variances, and actions management might take.
The possible reasons for the variances:
1
2
3
4
5
6
Possible actions management might take:
1
2
3
4
5
6

TASK 5
Chatham Slugg manufactures specialized paper clips. Its monthly budget for April 2020 is as
follows:
Budget
£
Sales units 4,000
Sales: 4,000 x £18 72,000
Direct Materials: 4,000 x 7kg (28000)
Direct Labour 4000 x (0.5 hours x £6.00) (12000)
Production Overhead (10000)
Selling and admin. Overhead (4,000)
NET PROFIT 18,000

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It may be assumed that all the overheads are fixed in nature.

The actual results for April were as follows:

Actual
£
Sales units 4,500
Sales: 4,500 x £17 76,500
Direct Materials: 4,500 x 8kg (36000)
Direct Labour 4500 x (0.5 hours x £5.00) (11250)
Production Overhead (10400)
Selling and admin. Overhead (3,800)
NET PROFIT 15,050

REQUIRED: Flex the budget for a sales and production level of 4,500 units and produce a
variance to the flexed budget. Use the templates below:

Template- TASK 5:
BUDGET FLEXED CALCULATIONS
£ £
Sales: 4,000 x £18 72,000
Direct Materials: 4,000 x 7kg (28,000)
Direct Labour 4000 x (0.5 hours x (12,000)
£6.00)
Production Overhead (10,000)
Selling and admin. Overhead (4,000)
NET PROFIT 18,000

BUDGET FLEXED ACTUAL FLEXED

BUDGET VARIANCE
£ £ £ £
Units sold 4000 4,500
Sales: 72,000 76,500
Direct Materials: (28,000) (36,000)
Direct Labour (12,000) (11,250)
Production Overhead (10,000) (10,400)
Selling and admin. (4,000) (3,800)
Overhead
NET PROFIT 18,000 15,050

Assessment
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