BUSINESS FINANCE

Business Finance

Business Finance

This paper is based on the financial performance of Cembelene PLC.

Q1(a): Definitions

Profitability: The term 'profitability' is defined as, “The making of gain in a business for the benefit of the owners”. Profitability is equal to income less expenses. The difficulty comes when you need to define income and expenses, and do so in a way that provides useful information about a firm's performance (Czarnecki, 2006).

Liquidity: The term 'liquidity' is defined as, “The degree of promptness with which assets can be converted into cash without excessive loss of value. By definition, money is highly liquid. Similarly, money in a checking account is considered liquid because it could be used to make immediate payments just as cash. The preference for liquidity is normally contingent on interest rate.” (Czarnecki, 2006)

Gearing: The term 'gearing' is defined as, “leverage or leveraging refers to the use of debt to supplement investment”. (Czarnecki, 2006)

Q1(b)(i): Strengths and Weaknesses

The way to determine if a health care organization is operating in an effective and efficient manner is through the use of financial performance indicators (FPIs). The review of the balance sheet, income statement, and cash flow statement is an essential and fundamental task to analyzing the financial performance of any health care organization. But this is only the beginning for successful financial management and analysis. The number and types of users of a health care organization's financial statements include management, board of directors, creditors, investors, government bodies, grant-making agencies, and the general public (Brigham, 2006). Unless a user is well trained in finance or business administration, the financial information found in these statements may seem an endless array of numbers with little meaning.

An analysis of FPIs gives the user a measure of the organization's performance. The primary sources of data for calculating these indicators come from the basic income statement, balance sheet, and cash flow statement (Brigham, 2006). However, FPI analysis is not just comparing different numbers from the balance sheet, income statement, and cash flow statement. It is comparing the numbers against previous years, other peer health care organizations, the industry, or even the economy in general. FPIs look at the relationships between individual values and relate them to how a health care organization has performed in the past and might perform in the future. For example, current assets alone do not tell a lot, but when they are divided by current liabilities, a user can determine whether the organization has enough assets to cover short-term debts (Brigham, 2006). FPIs may provide the very important early-warning indications that allow financial and other business problems to be identified, thus allowing early corrective action by management.

Q1(b)(ii): Ways to Improve Financial Performance

FPIs can be classified into several major categories, including profitability indicators, liquidity indicators, capital structure indicators, asset efficiency indicators, and other financial indicators.

Profitability indicators are an important concept in any industry or any organization. Few health care organizations could remain financially viable without a profit (or excess of revenues over expenses), especially over a long period of ...