Comprehensive Analysis of Business Performance, Accounting, and Financial Ratios assignment Sample

Introduction Of The Business Finance & Economics Assignment

The assignment will analyse the ways in which micro and macro environment affects operations of business environment. Macro and micro economics factors are contrasted in order to analyse impact of each factor on business performance. Role and branches of accounting helps in making reporting and decision-making process in a company. Further, importance of accounting is identified in the assignment to understand the importance of disclosure and consistency in accounting. The assignment also involves explanation of accounting ratios calculated involving efficiency and profitability ratios.

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Task 1: Business Performance and Competition

The concept of business performance relates to a close entitlement of commercial effectiveness which can be determined by the ability of an organisation to implement optimal management. The business performs significantly to fulfil its aim to offer services and products after meeting the consumer’s expectations and pReferences. In this segment of the assignment, a steady focus has been kept on the “branches of economics” within which all the businesses perform and experience competition from the markets. The “branches of economics” are critically discussed and thereafter their impact on business performance has been evaluated with justified illustrations.

Definition of the “two major branches of economics”

Economics can be referred to as the broad subject matter that is preliminarily concerned with an optimal distribution of resources within a society (Colander, 2018). In the subject matter of economics, there is mention of several branches that critically focus on different economic aspects. Predominantly there are two main “branches of economics” namely, Microeconomics and Macroeconomics. The branches that are outlined in the field of economics critically deal with the distribution productivity of the land as well as the management of businesses from both the micro and the macro aspects.

Discussion of the microeconomic factors that impact business performance

The study of microeconomics deals with the study of the behaviours as projected from the “individuals, households and firms”. These are essential to assess as it helps in the decision-making processes along with the critical allocation of resources optimally. This can be applied to the potential markets concerning the goods and services which thereafter deal with “individual and economic issues”. As per the suggestions of Besanko and Braeutigam (2020), microeconomics deals with the “economy on a narrow scale” to construct the decision-making of the economy in individual actors. For example, it can be mentioned that, microeconomics deal with the process by which local businesses make a decision regarding the allocation of the available funds optimally or the process by which a city can make decisions upon the spending criteria of government surplus.

The impact of microeconomics on their business performance concerning the decisions made for supply and demand functions. Microeconomic principles state that “all the other things being same” the business would increase the level of supply of a good or service as the price of the “good or service increases”. Thus the higher prices refer that a business will be impacted by higher production levels along with the providence of better supply for the manufactured products or services rendered. As opined by Arnold et al. (2022), the microeconomic concepts focus on the role of businesses and consumers play within an economy making specific attention to identifying the process by which these parties are making decisions. The decisions involve the concepts of whether a consumer will purchase a particular good and the quantity by which it will be bought. This further relates to the process concerning how the business will be determining the price that will be charged for a particular product by the business.

Discussion of the macroeconomic factors that impact business performance

The study of macroeconomics relates to conducting a thematic analysis of the entire economy which forms an integral part of the large-scale and general economic factors along with the process they are interacting within an economy. Macroeconomic concepts connect with the countless policies, technologies and resources which result to make the economic developments (Mitchell et al. 2019). The factors of macroeconomics relate to the economic outputs, inflation rates as well as unemployment rates that are thriving within an economy. These can be referred to be the indicators concerning economic performances which can be closely monitored by large-scale organisations like the government, consumers and businesses.

Macroeconomic variables have a positive impact on business performance as they stimulate the growth within an economy along with the creation of financial stability imparted to the organisations. This further involves the increased amount of demand concerning the products as well as services. The positive factors of macroeconomics help in the injection of more cash funds within an economy along with providence of encouragement to the industries for further expansion. The business performances are impacted by the macroeconomic variables as this suggests various policies to measure the controlling of deflation and inflation. Along with this, it helps explain factors determining the “balance of payments”.

Task 2: Role of Accounting

Discussion of the “role of accounting”

Accounting can be treated as the process that is used to measure, process and share the finances along with most adjacent information concerning the business operations. The accounting system involves various tasks like “recording and summarising” the business's financial transactions. Thereafter, the processes analyse, verify and then report the results generated. Based on the opinion of Akimova et al. (2019), accounting processes play their role significantly in the provision of financial information to all the required stakeholders operating within the business. They can belong from diverse levels like management, creditor and investors.

The purpose of conducting the accounting process is to ensure measurement and summarisation of the business activities and thereafter conducts critical communication of the results for management along with other interested parties. The role that is played by the accounting processes delivers key functions to run a business as this helps the business managers to keep track of their finances like expenses and incomes (Venter et al. 2019). Along with this, it helps to “ensure statutory compliance” and provides the management, investors and the government with essential qualitative financial facts that can be utilised to make strategic business decisions. Accounting helps to evaluate the business performance with the framing of financial statements as the financial records reflect the results concerning operations along with the financial position of the business. It further helps in the creation of cash budgets along with the indication for future cash projections.

Branches of Accounting

Financial accounting can be termed as the systematic method for recording the relevant business transactions based on accounting principles. It projects its primary objective for the calculation of profits as well as losses to deliver an accurate presentation of the financial position of the business. There are mainly three branches of accounting namely, cost accounting, management accounting and financial accounting.

• Cost accounting: This branch of accounting critically deals with an evaluation of the cost encountered with a product or any services offered. This calculates the accumulated costs in consideration of all factors involving the administrative and manufacturing cost which contributes to the production of output (de Adelhart Toorop et al. 2021). Its primary objective is to benefit the management by fixing the prices along with controlling the “cost of production”.
• Management accounting: This branch helps provide financial information to the management for delivering better administration to various businesses. It further helps organisations in making significant decisions to control various activities in the business. Its main focus remains to serve the business’s management with its requirement to make strategic decisions regarding the minimisation of cost factors along with the enhancement of profit-making.
• Financial accounting: It refers to the systematic methodology for the process to record transactions and creating the final statements of accounts like the “income statement, balance sheet and cash flow statements”. These are useful for creditors, and financial institutions to project accurate business performance from a financial perspective.

Discussion of the importance of five conventions of accounting for financial reporting

The five major conventions of accounting is as follows,

• Consistency: A business requires applying a similar accounting principle over a diverse accounting cycle. Without the application of this convention, the ability of an investor for comparing and assessment of the process by which a company performs in multiple periods can be challenging.
• Full disclosure: All the relevant information must be in consideration for potential importance and the relevant financial information must get revealed even if it is not detrimental to the business.
• Materiality: These conventions urge the companies to reveal all the material events and items to be disclosed (Nicholls, 2018). The information which influences the decisions made for an individual requires being included.
• Conservatism: This helps the accountants to remain risk-free while providing essential estimates of the assets as well as liabilities. This relates that if two values concerning a transaction are provided then the lower amount must be favoured.
• Cost-benefit: This accounting convention states that all benefits derived from the accounting system helps in the production of financial statements and report must outweigh the associated costs.

Task 3: Financial ratios

Particulars	Formula	2019 (£m)	2020 (£m)
“Operating profit	240	35
Sales	2500	2750
a) Operating Profit Margin	“(operating profit/sales)*100	9.6%	1.3%
Average inventory	350	410
Cost of Goods sold (COGS)	1850	2375
b) Inventory days	(average inventory / COGS)*365 days	69	63
Average Trade payables	187.5	182.5
Credit purchase	1500	1965
c) Payable period	(average trade payables/credit purchase)*365 days	46	34
Average Trade receivables	245	260
Credit sales	2500	2750
d) Receivable period	(average trade receivables/credit sales)*365 days	36	35
Current assets	595	690
Inventory	350	410
Current liabilities	190	295
e) Acid Test Ratio	(current assets - inventory)/ current liabilities	1.29	0.95
Net income	167	12
Average equity shares	400	400
f) EPS (Earnings Per Share)	net income / average equity shares	0.42	0.03”

Operating Profit Margin”

The estimation of margin considering the operating profit generated by the company states the profitable capacity of the business in generating operating profits as a percentage of sales. The “operating profit margin” critically declined from 9.6% in 2019 to 1.3% in 2020, as the number of operating profits reduced from 240 to 35 million GBP in 2019 and 2020 respectively. Thus, the lesser generation of operating profit delivered a negative financial performance for XYZ Plc from the profitability context.

Inventory days

The estimation of inventory days reflects the number of times the company had made ales as well as replaced the inventory during a financial year. As mentioned by Liu et al. (2019), The days are significant as this allows businesses in framing financial footsteps. The company, XYZ Plc took 69 days in 2019 and 63 days in 2020 reflecting that the sales had been initiated and the company is capable of replacing the inventory in lesser days. Hence, company efficiency increased significantly.

Payable period

The estimation of the payable period delivers an estimation of the total number of days taken by a company to pay the potential creditors and meet liquid obligations. Based on the calculations it can be understood that the company's lesser days in 2020 (34 days) compared to 2021 (46 days). Thus, the operational efficiency has accelerated.

Receivable period

Calculations made to estimate the receivable period reflect the number of days taken by the company to collect its liquid cash from the potential debtors. This company took 36 days and 35 days from 2019 to 2020 respectively which reflects that the efficiency to collect cash was similar.

Acid Test Ratio”

An estimation of the acid-test ratio helps highlight the liquidity preference of a company in generating liquid cash from the cash balances and its trade receivable amounts only (Dance and Imade, 2019). Therefore, the cash generated from selling stock is neglected. The ratio was 1.29 in 2019 which declined to 0.95 in 2020. This was caused due to the increase in current assets from 595 to 690 million GBP, inventory of 350 to 410 million GBP and current liabilities from 190 to 295 million GBP from 2019 to 2020 respectively. Ideally, the “acid-test test ratio must be 1:1.

EPS (“Earnings per Share)”

The EPS has been estimated for the business as this helps indicate the amount of money which the business is making against each share from the stock. It is widely utilised as a financial metric for the estimation of corporate value as higher EPS indicate higher values. In 2019 the EPS of the company was 0.42 which critically reduced to 0.03 from 2019 to 2020 respectively. This resulted due to a massive reduction in net income generated by XYZ Plc from 167 million GBP in 2019 to 12 million GBP in 2020. Thus, the investment ratio was negatively projected.

Task 4: Management Accounting

Definition of management accounting

The concept of management accounting refers to an integrated process that relates to the processes projected in the “identification, measurement, analysis and interpretation” of the accounting information. In the opinion of Hiromoto (2019), the application of management accounting helps the financial managers of a company in making sound decisions for the business along with the efficient management of daily operations. The main purpose of management accounting is to help the business make quality decisions within a competitive and complex business environment. It preliminarily focuses on the option to make better business decisions as the businesses require financial information which is credible. Management accounting can be identified as a major branch of accounting that involves the planning process and controlling attributes of the business operations. Management accounting benefits business management in the formulation of business policies after the collection of information and then processing the same to make useful financial insights.

Management accounting has been defined by many authors, as highlighted by Alabdullah (2019), “management accounting information contributes to the organization’s performance by giving feedback on carrying out the strategic plans and completing the work, and consequently enhancing the economy of the country”. Organizations have been using the “management accounting information” in a different way, and specifically highlighting the “management accounting information” that plays an essential role in the “effective management process”. Management accounting comprise of advanced benefits by providing the companies with up-to-date financial as well as the non-financial data to “the key decision-makers” so that a business can run efficiently (Alvarez et al. 2021).

Discussion of the importance of management accounting in “planning, control and decision-making of business”

The business leaders focus on making decisions with the incorporation of relevant “tools and techniques” which are provided by management accounting. Moreover, the application of management accounting helps in devising various plans and policies to make decisions that later help control the overall business performance and then analyse the applied accounting information.

• Planning: An implementation of strategic planning processes helps achieve the major objectives underlying within an organisation. Management accounting, therefore, helps formulation of business objectives requiring devising all the essential activities that are significant for implementation to achieve such business objectives. Information from management accounting can be entwined with planning as well as forecasting processes that help businesses to frame alternative actions for achieving the desired goals.
• Controlling: This function can be inculcated with strict “monitoring, measuring and correcting actual results” that help make sure whether the business plans and goals are significantly achieved. The performance reports and control that are provided by the operation of management accounting help highlight the actual as well as expected performance. These are key components which make significant corrective actions for controlling the operations.
• Decision-making: This function selects the best decision among various competitive alternatives within a business by incorporating statistical data as well as accounting information which are required to be furnished well. Analytical information is applied by management information concerning different alternatives that help to make easy decisions for the management. These include variance analysis, cash flow projections, comparing the budget with the cost generated and many more.

Conclusion

Further with the utilization of this information, a company is capable of performing its key business functions that involve “organising, planning, directing and controlling. It is analysed that commercial effectiveness can help in implementing optimal management of the company. Further, there are two major branches of economics, macro and micro economics, where micro economics analyses behaviour of households and firms. On the other hand, macro deals with business environment, thereby creating a financial stability of a company. Financial ratios have also indicated the profit and efficiency ratio of the company and earning of company on each share.

Reference list

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Alabdullah, T.T.Y., 2019. Management accounting and service companies' performance: Research in emerging economies. Australasian Accounting, Business and Finance Journal, 13(4), pp.100-118.

Alvarez, T., Sensini, L., Bello, C. and Vazquez, M., 2021. Management accounting practices and performance of SMEs in the Hotel industry: Evidence from an emerging economy. International Journal of Business and Social Science, 12(2), pp.24-35.

Arnold, R.A., Arnold, D.R. and Arnold, D.H., 2022. Microeconomics. Cengage Learning.

Besanko, D. and Braeutigam, R., 2020. Microeconomics. John Wiley & Sons.

Colander, D., 2018. Is Economics a Moral Science?. In Economic Objects and the Objects of Economics (pp. 85-96). Springer, Cham.

Dance, M. and Imade, S., 2019. Financial ratio analysis in predicting financial conditions distress in indonesia stock exchange. Russian Journal of Agricultural and Socio-Economic Sciences, 86(2), pp.155-165.

de Adelhart Toorop, R., Yates, J., Watkins, M., Bernard, J. and de Groot Ruiz, A., 2021. Methodologies for true cost accounting in the food sector. Nature Food, 2(9), pp.655-663.

Hiromoto, T., 2019. Restoring the relevance of management accounting. In Management Control Theory (pp. 273-288). Routledge.

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Nicholls, A., 2018. A general theory of social impact accounting: Materiality, uncertainty and empowerment. Journal of Social Entrepreneurship, 9(2), pp.132-153.

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Venter, E.R., Gordon, E.A. and Street, D.L., 2018. The role of accounting and the accountancy profession in economic development: a research agenda. Journal of International Financial Management & Accounting, 29(2), pp.195-218.