Part A: Financial Ratio Analysis of Harridges Limited
a) Calculation of ratios
In order to materialise calculation of ratios, division across four major categories will be considered which would include liquidity parameter, solvency parameter, turnover parameter as well as profitability parameter. Consideration of calculation and analysis of ratios will include assessment periods of 2022 and 2023 respectively applicable for the company concerned Harridges Limited (HL). The following is an individual demarcation about respective financial performances identified for individual ratio parameters or categories.
b) Business performance evaluation and analysis from a share purchaser’s viewpoint.
i) Liquidity Ratios
Figure 1: Liquidity Ratios
Current ratio
According to the above calculation of current ratios, the results identified in 2022 and 2023 are considered as 1.84 and 1.36:1 respectively where current ratio is identified as the division between current assets and current liabilities. This indicates a relatively decreasing performance for 2023 as compared to 2022 caused mainly due to lowered current assets value for HL in 2023. The lowering of current ratio is considered to be a major issue from a share purchaser’s viewpoint since low future investments are likely to be experienced due to lack of adequate working capital efficiency.
Quick ratio
As per above calculation of quick ratios, numerical expressions are 1.21 and 0.54:1 in which division between quick assets and current liabilities is contemplated to arrive at a quick ratio. The identified trend of quick ratio is considered to be regressive in 2023 for HL which can implicate lack of adequate availability of liquid financial resources. Sihombing et al. (2022), critically stated that low quick ratios are also likely to affect future harmony from a share purchaser’s viewpoint which can likely reduce financial attractiveness of the company.
Debt- equity ratio is the primary ratio calculated for solvency parameters which includes numerical expressions of 0.45 and 0.42 times respectively indicating a marginal performance growth in 2023 as compared to 2022 for HL. Formula applied for determining debt-equity ratio is considered to be the proportion between debt and equity respectively. Novyarni and Ningsih (2020), growth in debt-equity ratio is considered as a beneficial prospect for a company to encourage higher capital gearing leverage as well as to manifest a healthy capital structure body. In terms of future investment opportunities applicable from a share purchaser’s viewpoint, a high debt-equity ratio for HL is likely to attract higher financial interests in future thereby allowing the scope to magnify financial prosperity.
Financial leverage ratio
Additionally, financial leverage ratio is the second ratio calculated under solvency parameters which contains numerical expressions of 1.82 times thereby indicating no changes or influences in performance. Mathematical and accounting formulation of financial leverage ratio is further considered as the fraction between total assets and equity which establishes overall financial net worth available to HL. The stagnated performances applicable for financial leverage ratio are likely to pose no major interests from a share purchaser which can perhaps impact future capital valuation for HL if business expansion is contemplated.
iii) Turnover Ratios
Figure 3: Turnover Ratios
Inventory turnover ratio
Inventory turnover ratio is the primary ratio calculated under turnover perimeter which contains numerical expressions of 6.24 and 5.88 times respectively. Mathematical formulation of inventory turnover ratio is further detected based on dividing inventory from cost of goods sold. This increase in inventory turnover ratio for HL is considered as an adversity since low inventory levels are being maintained and can cause obsoletion of available products and services that can be sold. Daryanto and Rizki (2021), critically illustrated and explained that lowering of inventory turnover ratios are also likely to reduce interest from a share purchaser since more credit sales are being offered to customers which can hamper future cash operating cycles.
Receivable turnover ratio
Receivable turnover ratio is the second ratio calculated under the turnover ratio parameter which expresses values of 24.76 and 24.14 times thereby indicating a relatively fractional decrease in performance of 2023. The decrease in receivable turnover ratio is perhaps considered as a beneficial characteristic since a higher number of customers are being held and served by HL for boosting financial corporate and organisational development. This ratio is also identified as an integral part of the turnover facilities available to an organisation and is formulated by considering the division of accounts receivables from sales. The decrease in receivable turnover ratio is a beneficial catalyst available for assessment to a share purchaser which is likely to magnify future participation since expected future cash flows exist in bulk quantities.
Payable turnover ratio includes numerical expressions of 5.20 and 6.27 times also indicating a significant decline in performance of 2023 and this ratio is formulated by symbolising the proportion between cost of goods sold and accounts payable. Decrease in accounts payable ratio is considered as a beneficial prospect for HL replicating higher vendor and supplier participation for acquiring raw materials for production processes. Musa et al. (2022), illustrated that increase in payable turnover ratio should encourage more activities from a share purchaser since high financial trustworthiness is available to an organisation.
iv) Profitability Ratios
Figure 4: Profitability Ratios
Operating Ratio
Operating ratio contains numerical values of 11.92% and 10% respectively indicating a significant devaluation and performance which is likely to affect future operational reliability for HL and is identified as the proportion between operating profit and sales. From the perspective of a share purchaser, low operating ratio is likely to implicate lower active participation since profit availability is minimal.
Net Profit Ratio
Net profit ratio contains numerical values of 5.96% and 5% for HL also indicating a relatively lower performance in 2023 which can affect financial sustainability. Dewi and Mustanda (2021), critically explained that low net profit ratio can induce low investor participation since proportion of both net profit and sales is relatively identified to be lower.
Return on Equity
Return on equity is considered as the division between net profit and equity that contains numerical values of 14.09% and 14.58% representing a marginal performance growth which is likely to encourage more investor traffic in future. High values of return on equity for HL are also likely to encourage more funding opportunities from a share purchaser which would magnify future equity valuation of the company.
Part B: Budgets and Accounting Information Users
Question 2: Distinct purpose of budgets and their significance towards financial management
The distinct purposes of budgets are primarily identified to performance assessment of managers as well as initiating control of organisational activities. Additional purposes of budgets further include communication and collaboration, adopting flexibility as well as accomplishment of favourable results. The following is an individual assessment of budgetary purposes corresponding with their significance towards financial management.
Performance Assessment of Managers
Performance assessment of managers is identified as the primary budgeting purpose in which measurement of managerial efficiency in an organisation is established. The performance assessment can be tracked based on considering quantitative or qualitative evaluation in order to identify how efficiently they contribute towards organisational development. This purpose of budgeting is considered to be a highly important and significant parameter of financial management since it is considered as the preliminary stage of an organisation developing a favourable financial roadmap. Higher available performances and outputs from managers are likely to allow an organisation to accomplish its financial goals without any major challenges.
Initiating control of organisational activities
Initiating control of organisational activities is identified as the second distinct purpose of budgeting where various operational functions are effectively and efficiently synchronised in order to gain maximum favourable output. As expressed and idealised by Tzenios et al. (2022), initiating control of organisational activities is further considered as a vital purpose of budgeting since it enables an organisation’s ability to minimise costs. From a financial management perspective, initiating control of organisational activities is considered as a significant requirement since higher costs managed are likely to transpire towards incremental profit generation.
Communication and collaboration
Communication and collaboration are identified as the third distinct purpose of budget which entails the concern to create a stimulated and synchronised communication chain existing within the internal boundaries of an organisation. Budgeting also allows an organisation to reduce communication gaps between internal and external stakeholders and also reduces the chances of grapevine formation which can hamper long-term organisational development. Collaboration is also identified as a major feature of budgeting and existence of a healthy communication chain allows better scope to form partnerships thus encouraging a company to maximise financial credibility in financial management parlance.
Adopting flexibility
Adopting flexibility is identified as the fourth distinct purpose of budgets where an organisation obtains operational and financial mobility to improvise as per their goals determined. As per statements and opinions of Babajide et al. (2023), adoption of flexibility is also beneficial in financial terms since ample monetisation opportunities can be created to ensure financial sustainability and enhancement of financial management skills.
Accomplishing favourable results
Accomplishing favourable results is identified as the fifth purpose of budget which allows comparability features to track actual performances and compare alongside budgeted performances. Favourable results are likely to be achieved when actual income is greater than budgeted income and when actual expenses are lower than budgeted expenses. The accomplishment of favourable results in financial grounds encourages a company to achieve a higher financial competitive position thereby enhancing prospects of implementing healthy financial management principles (Bartocci et al. 2023).
Question 3: Important accounting information users available to a university
The important accounting information users available to a university are considered as creditors, investors, government and federal bodies, researchers and owners. Following is an individual discussion about the identified accounting information users and their individual identified purposes.
Creditors
Creditors are identified as the primary users of accounting information applicable for a university. The role and responsibilities of creditors mainly include assessment of credit paying abilities of a university principally based on loans taken either on a short or long-term basis. Lee et al. (2023), stated and illustrated that the purpose of creditors for financial accounting information is considered to be related with assessing available financial funds held by a university and how future monetisation opportunities can be created based on loans and borrowings offered.
Investors
Investors are identified as the second major users of accounting information applicable and available to a university whose functional roles and responsibilities include exploration of investment opportunities for self-monetary benefits as well as benefits of the university associated. Purpose of investors applicable for accounting information usage include identification of abilities for a university to payback or offer substantial returns for magnification of financial portfolio value. The purpose of investors also includes the scope of business expansion or monetary infusion that can be induced in favour of a university to gain maximum financial favourability and outputs.
Government and federal bodies
Government and federal bodies are identified as the third major user of accounting information applicable to a specific university whose fundamental roles and responsibilities involve laying out business conduct principles and practices. As per views and expressions of Guevara et al. (2021), purpose of financial accounting information for government and federal bodies is mainly constituted for detecting overall financial worth generated by university through appropriate codes of conduct followed.
Researchers
Researchers are identified as the fourth important user of accounting information applicable and available to a specific university whose fundamental roles and responsibilities involve identification of literary scope that can be magnified when affiliated with a particular educational institution. Significance of researchers applicable to a specific university is also deemed to be a credible factor since higher association of researchers are likely to magnify accreditation and goodwill of a specific university. Purpose of accounting information usage by researchers is considered to be a major prospect since they can evaluate overall financial perquisites and benefits that can be achieved by researching on a particular topic with affiliation formed between them and a university.
Owners
Owners are identified as the fifth major user of accounting information applicable to a specific university whose principal roles and responsibilities consider identification of overall financial worth generated on yearly or semi-annually basis. Purpose of accounting information usage by owners is considered to be an important aspect to ensure overall fees collected and project how much students are likely to get admitted thereby influencing future monetisation opportunities that can be capitalised upon.
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Reference List
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